Pricing is tough. Price too high and people complain that you’re losing deals; price too low and watch your revenues and profits plummet.
Pricing can both drive and be driven by the sometimes circular dynamic of customer perceptions. By setting price low, you can cheapen the perceived value vs. driving elasticity. On the flip side, you can’t set price too high, otherwise it is higher than what an adjacent or analogous product “should cost.”
Finally, pricing can be super visible. In consumer businesses, price is often on the home page and available to customers, partners, and competitors. Internally, it’s like the Company logo where everyone, including the CEO, likely has an opinion.
So why mess with it all? Because done right, it can be a key driver of growth and profitability.
Andrew Malcolm, CMO of Evernote, recently took on a massive effort to shift the way they think about price. He was kind enough to share his learnings at TCV’s recent Customer Acquisition Forum, hosted by TCV General Partner David Yuan. Check out our Q&A below and download Andrew Malcolm’s presentation.
Topics and lessons learned include:
- Conversion vs. engagement
- Value exchange
- Customer segmentation and pricing elasticity
- Executing a pricing change
- How to know when you have a pricing opportunity
David Yuan: Thank you for joining us, Andrew. To start, can you talk about Evernote’s creation story, mission and evolution? It’s been quite a ride.
Andrew Malcolm: Our founder, Stepan Pachikov, has Parkinson’s Disease and always believed we could replace any part of the body with medical science. He said, “You can get a prosthetic, you can get a heart transplant, you can grow a liver, but only technology can replace the synapses in my brain.” He set out with the idea of solving this problem. While Facebook could be the public narrative of your life, we aspired to be the private one.
And it was very successful. We had a great run and penetrated the upper echelons of the market to degrees that many people hadn’t seen. In 2011, Inc. called Evernote the “Company of the Year.” Then in 2015, we were called “the first dead unicorn.” We were burning money, we hadn’t really released product in two years, and we introduced a monetization strategy that actually included trying to sell socks. Consumers don’t want to pay for software, but they are OK paying for socks. I am not sure that this was the best way to go about delivering the value of Evernote. This was around the time I joined the company. That’s about when you and I had lunch, Dave.
18 months later, I’m proud to say Evernote hasn’t died. In fact, we’ve done a bunch of amazing things. We just passed 200 million registered users around the globe, a user just gave us our 5 billionth note, we won our 7th Webby, and more than 80% of our users are now outside the U.S.
David Yuan: I remember that lunch. You had a lot of irons in the fire, and a lot to get done and, frankly, fix. What was the biggest needle mover?
Andrew Malcolm: Although my title has always said marketing, I am much more of a revenue guy. We basically went from being a company that was burning cash to being cash flow positive without spending a dollar on marketing or releasing a new feature. It was all through pricing. Over a decade of trying to figure out how to deliver revenue in the next 90 days, I have developed a deep relationship with pricing that evolved from finding it unapproachable to now being best friends.
A big part of Evernote’s problem was that we were pricing the product wrong. Evernote has strong penetration among wealthy demographics. At 200 million users, you’d think we reflect the internet-connected population but actually, if you are in the U.S. and you make more than $100k as an individual, there’s a 50:50 chance that you have an Evernote account. After gleaning those insights through data, we realized there were opportunities around brand and pricing that were obvious. We had to figure out how to price our product in a way that would drive revenue and growth, which required answering multiple tough questions.
The first is, we had to figure out what we were pricing. For a long time, we thought we were pricing some of the features and content, but that’s not really what we asked people to pay for. The second thing was we priced to our customers instead of our products, which leads to questions about price elasticity—where does this price elasticity actually exist? It’s a concept we all talk about, but sometimes there’s nuance to answering the first question that informs you a lot about the second question. Lastly, we say “pricing” as though it exists in the abstract—as though it’s not connected to your brand or the ways you present that price. Pricing is way more than the dollar amount that you elect to charge along the way.
David Yuan: As you started to rethink pricing, where did you start? What was the initial focus?
Andrew Malcolm: In every freemium business that I’ve worked with or invested in, everybody seems to think that the problem is all about conversion to pay. The truth is conversion to pay is rarely the problem—it’s almost always about engagement. So I thought about the conversation around the metric of time well spent.
The only truly constrained aspect in the world is your time. You only have 24 hours in a day. Where are you or users going to spend them? When benchmarked against any publicly traded freemium models—meaning the percentage of registered users who are actively engaged and the percentage of active users who paid us—we hadn’t really cracked either one, but we were within benchmarks of converting our active users into paying users. If people thought about price as the dollars you charge, then you’d think there would be elasticity related to price. It’s not because you are not pricing your product at a certain point. You are pricing who your customers are, and we realized the problem was that people weren’t engaging with us nearly enough.
David Yuan: Once you realized that you needed better engagement, what was the next step? How did you figure out what people would pay for?
Andrew Malcolm: If you run a freemium business and you want to introduce paywalls around certain things, it’s fascinating to me that we continue to put our best features behind the paywall. We did this at Skype with group video calling minutes, and we do it at Evernote with Advanced Search. Try to communicate the idea of advanced search to somebody without asking them to experience the difference between advanced and keyword search. It doesn’t matter how good of a wordsmith you are.
Contrast that with what Dropbox does so simply and brilliantly by saying, “Did you really like that storage? Would you like some more storage?” And people pay for more storage. It’s a logical moment to have a paywall related to something that you’ve already experienced, so we started researching questions like: Where is the most impactful and least disruptive place for paywalls? What are users happy to pay for, willing to pay for, and hate paying for?
We ultimately learned that we had to figure out what people actually valued about Evernote. It always comes back to that content idea. Limiting the content that you put in Evernote would have been a terrible idea because that’s what makes it such a great service. So we needed the best proxy we could find so people would keep giving us memories, but would also be willing to pay at some point along the way.
We also needed to figure out what free users versus paid users cared about.
David Yuan: What insights did you learn from analyzing those differences?
Andrew Malcolm: We found that there was no real difference between what free users and paid users valued. I can’t get into specifics, but there was a core capability —“Capability A”— that makes Evernote, “Evernote.” All users valued it, free or paid. We put Capability A behind the paywall because they delivered great convenience and value and consumers are willing to pay for value.
The second most fascinating thing was how free users interacted with an advanced feature —“Feature B”—that we charged for. They didn’t value it because they never experienced it, and as soon as we saw this, it became obvious what we had to do—which is to take down the paywall on that advanced functionality. Turns out that given access to Feature B users do actually value it once they got to use it and understand it. This led to the idea of having “a value exchange” with somebody. We always want to give more than we take, and I want you to feel like you are paying for something that’s super valuable. People are willing to pay for things that they find super valuable, and our job as marketers is to convey the value they should be experiencing of those things.
Through this process, we realized that what we were actually pricing was Capability A and not Feature B. We ask people to have a reasonable value exchange with us about those things.
David Yuan: Okay, so once you figured out what you can charge for, what went into deciding how much to charge?
Andrew Malcolm: The primary consideration in determining pricing is elasticity. Most of the time, we believe our installed base is much more sensitive to price than they actually are. And I think that’s because we are good people who never want to take more money from people than what we are already asking them for.
It’s also important to keep in mind that you don’t have one price elasticity. In fact, you don’t have one price elasticity around any single product. Even one customer has different price elasticity at different moments in time. It all exists on a continuum, and you have to continue to think about where your price elasticity may change based on the segment of customer you are dealing with. For us, there are paying people and non-paying people, whom we call price insensitive or price sensitive, and our pricing strategy for every one of those quarters is different.
There’s a ton of ways to think about it, but here’s a basic framework that I think adds a lot of clarity:
David Yuan: So what’s next? So much of pricing is execution in addition to strategy. How did you go about implementing these changes?
Andrew Malcolm: That’s a great observation, Dave. People act like price is a single act. Pricing is all about that presentation.
When you start thinking about presenting your price, don’t think about the words nearly as much as you think about the moment. Moment testing is twice as impactful as having the right channel, which is twice as impactful as saying the right words. And as marketers, we spend a lot of time on copy testing when we should be moment testing.
And the upside is, it’s incredibly cost effective. How can we get away without spending a single dollar on media? It’s because we have users, 600 million hours of people’s time spent on our app. It’s contextually relevant time, it’s free to me, we can target, and I have data that is sitting there to tell me what’s the next most valuable thing that you can do. More times than not, users share a note that’s valuable with another user because you are both now in the ecosystem. This might be our most valuable media time.
David Yuan: Can you give me an example?
Andrew Malcolm: Take a PDF presentation. If you upload a PDF into Evernote, you can go in and actually mark it up with a pen or your finger, or put any number of annotations around it.
If we present you with PDF annotation the moment you upload that PDF, nobody clicks. They think, “I just put it here. I want to do something with it, not get distracted by an offer.” If we present PDF annotation to you the moment you close the PDF, some people click. If we present it to you five minutes afterward, when you’re done with that presentation and thinking about, “How can I do this better?” you have 10 times more people click. Those minutes are way more important to me than having the right words to say in those messages. Of course, I still copy test, but I’m letting you know that mathematically that that’s what you want to do.
David Yuan: To finish the Q&A where we began: There can be a lot of inertia around pricing. How do you get over the hump?
Andrew Malcolm: I do think it can be tough to get started. A couple of ideas to get the ball rolling downhill: Experiment with the next beta. If it’s in beta, you can get away with a lot, so present multiple prices. Another is Canada—my go-to country (because our CEO is Canadian) for changing prices is Canada. Everybody thinks Canada is bigger than it is, and it looks and behaves an awful lot like the U.S., so I always change the price in Canada if we’re trying to learn something a little more.
Finally, always push yourself to think about what the real drivers of price elasticity are. Say you’re a dog care company, days of the week are going to be a big segmentation point—e.g. Saturdays vs. Tuesdays. Your product guy will always tell you it’s the same product on Tuesday and Saturday. It’s not the same product on Tuesday and Saturday. It’s like an appointment to get my dog groomed. Who’s got Tuesday at 10 AM free? Saturday during naptime is a premium slot though, so I’m willing to pay a premium price—same service yet not the same price. If you don’t know what the elasticity is, then go figure that out. And figure out what it is users are interested in and need to have a value exchange with you.
David Yuan: Awesome, incredible stuff. Thanks for sharing Andrew, and as an Evernote user err.. addict, I’m excited to see you guys continue to tech-boost my brain!