Monetization Strategy: Premium Value Flashcards
Premium value
Premium value is the subset of product features which provide enough value to the customers that they are willing to pay a premium for using it.
Below this threshold, the customer is agnostic towards the product and if asked to pay, would be comfortable discontinuing their use of the product.
Customers can often raise the premium price they are willing to pay depending on the amount of value they are getting. Consider Amazon’s shipping options below. While the standard shipping fee is $3.99, a higher fee (nearly 2x) may be acceptable to the customer if the shipping can be expedited.
What are some of the problems with the ”Most Important / Not Important” survey commonly used to discover premium value?
This survey does not lead to the discovery of premium value for the following reasons:
Survey design problems: The respondents are often not forced to make a choice, so everything ends up being important.
Interpretation bias: The respondents have different interpretations of the rating scale and skew results. The responses below are by a different respondent though directionally they communicate the same preferences as the above respondent.
The bottom line is that this method of asking customers what they value does not reveal the subset of the product that can be considered as ‘premium value’ for them. Hence, we need a more actionable method for discovering the value metrics.
Maximum Difference Scaling (Max -Diff)
Maximum Difference Scaling, or Max-Diff for short, is a technique to evaluate the relative importance of a number of value proposition alternatives, aka product features.
Max-Diff Output
Feature Importance: A ranked list of features based on their importance as well as the importance gap between them. This helps build feature clusters.
Premium Value: The feature cluster that offers the maximum value to the chosen persona as defined by how many times it is valued most important by respondents. This constitutes the set of value metrics for that persona and it helps inform the pricing metric which we will look at in the next lesson.
Max-diff analysis
Once all responses are collected, they are tallied and analyzed for patterns. Several techniques exist for analyzing the output of Max-Diff surveys. We will not go into detail for each as they are outside the scope of this course. Briefly, they are:
Count Analysis: Most commonly used technique, that tallies the number or percent of times each alternative is chosen as most or least important.
Logit Modeling: Model the utility of each alternative using a logit model.
Hierarchical Bayes: More advanced mathematical technique.
What forms the basis for a pricing plan?
Mapping persona segments to value clusters forms the basis of a pricing plan
What is the main benefit of using the Max-Diff survey
Max-Diff better enables the mapping between value clusters and persona segments
Max-Diff constraints
Due to the combinations of alternatives and the resulting number of questions that need to be asked from respondents, Max-Diff is the most efficient method up to 20 alternatives. Beyond that it becomes complex for respondents to understand and give a meaningful response.
five amplification methods
Usage Network Functionality Integrations Financials
Amplifiation: Usage
Encouraging greater usage of the product amplifies the value for users.
Google Photos encourages the use of the product by offering free storage for less-than-original quality. However, as soon as the user desires to store original quality photos they will start using up their storage quota thereby inching closer to paid plans with greater storage capacity.
Amplication: Network
Acquiring a user’s personal or professional network makes the product more valuable for the user. (Slack/Fitbit)
Slack brings its users close to their workplace network. They make it easy to invite colleagues and enable other viral mechanisms for acquiring the workplace network. This strengthens the case for upgrading to pricey Enterprise plans and, in addition, makes it hard for any user in the team to switch to another tool.
Amplication: Function
Offering a complete solution for all needs helps users accrue more value.
Stripe is a good example of going deeper into the functional needs of their customers and offering solutions for more than just payment facilitation. International payments, fraud detection, reporting and analytics – all these needs are deeper in the customer journey on the upgrade & expansion path after the customer has become familiar with the basic payment feature.
Amplicattion: Integrations
By offering to integrate seamlessly with several tools, they reduce the barrier to adoption for prospective customers in case that prospect is deeply tied to one of those tools.
Amplitude offers integrations with tools in several categories ranging across marketing automation, attribution, data warehousing, collaboration, business intelligence and customer data platform. In fact, they support multiple tools in each category.
Amplification: Financials
Improving financials either on the cost or revenue side will help users accrue more value.
LinkedIn offers several ways to amplify the value of the platform. It has been popular for recruiting and general networking. However, sales and marketing teams use it heavily for prospecting and lead generation which in turn helps them generate more revenue.
Goals of a Unit Economics model
A unit economics model measures the economic efficiency of a product’s acquisition and revenue generation.
How much value does a business generate from a single customer?
How much does it cost to acquire a single customer?
How long does it take to pay the cost of acquiring a single customer?
How well can the business compete in the market?
What will be the impact of investing in growth on profits?
Gross profit
Revenue - COGS
Operating Profit
Gross Profit - Operating Expense
Operating Expense
CAC + Support Cost (paid users)
CAC
Marketing Cost + Support Cost (Free users)
Revenue
Average Sales Price (ASP) x # customers
Unit Economics Model: inputs
Number of paid customers Average sales price Cost of Good Sold Total marketing spend Support cost for free users (leads) Support cost for paid customers Customer retention rate Discount rate Customer lifetime duration
Unit Economics Model: Transformations
Total Revenue Total CoGS Gross Profit Customer Acquisition Cost Operating Expenses Operating Profit
Average Sales Price
Average Sales Price, ASP: The average price paid by the customer. For ScreenGrabr, there are only three price plans for now. Their weighted average is the ASP. For some products, this can be quite complex as different customers may have different spend thresholds.
A lead
A lead is a user that signed up for free and may eventually become a paid user. Leads and free users will be used interchangeably.
Support Cost
Support Cost: Any infrastructure or service cost for supporting the usage of the product is support cost.
Marketing spend
This is commonly the upfront advertising / other marketing spend.
Customer Lifetime Duration
is the average duration before a customer churns. We will use 3 years for the ScreenGrabr example, although this varies from product to product.
Why is the cost of supporting free users counted towards CAC?
The support cost for free users is incurred as part of nudging them towards becoming a paid user. It is hence counted as part of acquisition cost
Unit Economics Model: Outputs
Lifetime Value, or LTV
Customer Acquisition Cost, or CAC
LTV : CAC ratio
Payback Period
What is LTV?
Lifetime value, or LTV for short is the total value generated by a customer before they churn.
Formula for calculating LTV
LTV = m ( r / (1 + i - r) )
m - Operating profit
r - Retention rate of customers. For ScreenGrabr, we have simplified the situation and assumed all customers are retained. Later, we will remove this simplifying assumption.
i - Rate of Discount. For ScreenGrabr, we have simplified the situation and removed the discount rate.
LTV:CAC ratio
The ratio of LTV to CAC informs the ease with which a company can acquire customers while remaining profitable.
If the ratio is 1:1, it is impossible to be profitable – you have barely broken even.
If the ratio is slightly better than 1:1, it is hard to be profitable especially as you grow.
For SaaS businesses, a ratio of 3:1 is generally recommended.
Payback Period
Payback period is the amount of time it takes for the profits to pay back the cost of acquiring customers. The cost of acquiring each customer is an investment over a time horizon that should first break even by profits earned and then create positive cash flows going forward.
Payback Period Formula
Payback Period = Customer Acquisition Cost / Operating Profit
Mistakes in calculating CAC
The marketing cost of acquiring non-paying users is incorrectly excluded.
The platform cost of supporting free trial/freemium users is incorrectly excluded. Their unpaid usage helps increase their willingness to pay later on.
Only the cost incurred for paying customers is included in the numerator. This will incorrectly show lower costs.
Both paying and non-paying users are included in the denominator. This will incorrectly show lower costs.
Not measuring CAC per channel is wrong. The best insights are revealed by segmenting along channel cohorts.
mistakes in calculating LTV
Revenue vs Profit: Revenue is often used in LTV calculation. This is misleading. Profit is what the business pockets and gets to reinvest in growth.
Not enough time periods are included when measuring churn. For example, in annual plans measuring churn for less than a 12-month period will yield unrealistically optimistic LTV.
LTV differs by channel and customer segment. Not analyzing LTV by channel is wrong. The best insights are revealed by segmenting along channel and customer segment cohorts.
Discount Rate
Discount rate is the interest rate used to determine the present value of future cash flows in standard discounted cash flow analysis.
