Want to know why charging $12 / year converts higher than $9.99?

Posted on Feb 3, 2011 | 52 comments


As many of you know I run a weekly webcast called This Week in VC that’s getting between 25-35,000 weekly views across ThisWeekIn.com, YouTube & mostly iTunes.

Yesterday’s show floored me. I consider Gregg Spiridellis a good friend. We’ve hung out periodically over the past few years and I have enjoyed debating many startup topics. Yesterday, we got them all on record and in a very interesting level of detail.  If you have or are thinking about a business in the video space you’ll enjoy hearing from Gregg but even more broadly this is a great conversation for entrepreneurs, investors or industry analysts.  Here’s the link.

This video discusses issues like:

1. Why do a freemium model?
This is to drive marketing and any IT or infrastructure spend can be seen as such. Your goal is to increase the top end of the funnel (more people using the free product) and increase the rate of conversion to paid. In many freemium business this conversion is in the single digit percentages.

2. How did you determine the right price points for your product?
Like many companies they experimented with many pricing models. The first did a “purchase credits” model like iStockphoto where you then burn down the credits you bought. They realized for them this was dumb because people didn’t want to use up their credits so viral adoption wasn’t happening quickly enough. They switched to a flat rate model and sharing went up immediately.  They tried lots of price points – $13.99, $9.99 per year – and nothing was amazing. When they increased price from $9.99 to $12 conversion went up!

Gregg says at $9.99 there was no frame of reference for the value.  At $12 / year he was able to frame users with the thought, “Am I getting a dollar of value per month from JibJab? Sure, of course I am. Sign me up.”  Awesome. Counter-intuitive. The kind of thing you only learn by doing and testing. My key take away – frame of reference in pricing is important.

3. How has the viral coefficient been for you?
Gregg gave us specifics on how viral adoption has worked.  He started by using email (send your eCard to a friend) and there he sees 3-4 clicks back per share action.  He then was one of the first people to implement Facebook Connect. The viral adoption went to 15-20 per share action. The bigger aha was using the information from the social graph to drive marketing. If he can tell you when your friends birthdays are via Facebook he can drive eCard shares. This has been a phenominal part of his recent success.

<Small plug> – I invested in an awesome company called … awe.sm … that is a performance tracking tool that let’s you measure efficacy of channels like this (email, facebook, twitter, linkedin, etc.) as well as what drove the success of the campaigns. They’ve worked with a few small companies like Zynga, Playdom, GroupOn and TopSpin Media.  If you have this sort of need – check ‘em out.  </end of plug>

4. What is the mix of revenue between ads, subscriptions, digital downloads & ecommerce
My favorite quote of the show, “Gregg, what’s the mix of revenue types?” His response, “I’m not going to break it out exactly but let’s just say the subscription portion looks like PacMan. I can’t tell you how big the mouth is. But it’s PacMan.”  I forgot to get him on record on the show, but Gregg writes all the lyrics for the big presidential videos they’ve done – you can see where the humor of JibJab comes from.

JibJab doesn’t do ad revenue at all.  Tune into the show – we get into a long discussion of eCPMs on YouTube, his history of ad / revenue shares and why he believes it isn’t the right model for JibJab.

5. How did you go viral initially?
All viral adoption starts with one thing – great content. That’s what JibJab  focused on.  They never did any PR or marketing to get their videos to first get shown on the news during the 2000 election. They did a rap battle between Bush & Gore – I tracked it down. LOL! I hadn’t seen this before. Click image below if you want to laugh for 1:53. This is where it started blowing up.

And I’m sure everyone remembers the video that put them on the map – the one I first saw – which was the Bush/Kerry video This Land is Your Land (“you have more waffles than a house of pancakes), which was part of the 2004 elections and both candidates were asked about while they were campaigning.

6. How did the Introduction of YouTube affect your business?
It changed everything. JibJab has an ad model that relied on exclusive distribution deals with the big portals. In 2005 they realized that this business was going to evaporate over night with the introduction of YouTube.  They went in search of a new business model, which ended up being eCards (American Greetings does $80 million / year with a crappy product, there has to be a good business there!).  Gregg talks in the video about how they went in search of a business model and how they found one.

7. Why did you raise VC from Polaris & how have they been to work with?
After 6 years of no VC they realized that as a national brand they’d need to raise money if they wanted to grow. They took money from Polaris and have been delighted with their participation.  I know this because Gregg has told me several times off camera. In the video he talks about how he chose them and why he likes them.

8. Working with a family member (Evan, the co-founder is his brother)?
Gregg founded the company with an equal partner – his brother Evan.  It works well because they always had well defined roles.  Evan is artist who is the creative genius who was working with the low-cost film medium in the late 90’s.  Gregg is an ex Investment Banker and Wharton MBA.  It was a marriage that worked well from day 1.

9. How do you keep the momentum after 11 years?
We had a discussion about how businesses change after the company really isn’t a startup anymore. He talked about what drives his recruiting decisions and whether he thinks he’d ever sell JibJab.  The most important trait in hiring to Gregg has always been smart people who are hard working & a good cultural fit.  He cares less about specific experience because great people always pick stuff up easily.

And there is so much more. Including how he got the name JibJab, why he’s build the company on the eCard model and where he got the idea (that one is brilliant – by trolling through 10-k public company filings looking for profitable business models), whether he’s Greek or Jewish, how he got the idea and what it was like meeting Obama & Bush having spoofed them.  Do yourself a favor – find an hour to watch this great episode. I promise you Gregg doesn’t disappoint.

Appendix:
** I have enjoyed every episode that I’ve done and keep wanting to write up the notes from some of the previous shows but it’s time consuming. Any takers in a trade for helping do some write-ups against whatever you want? Advice, coaching, intros? It’s such a shame that I haven’t written up such great interviews as Seth Sternberg, Howard Morgan, Tom McInerney, Yves Sisteron, Mike Yavonditter and many more.

  • http://www.hypedsound.com jonathanjaeger

    Great episode! The freemium discussion was interesting, since the psychology behind people's choices is sometimes surprising. I recommend Predictably Irrational and Made to Stick for learning about why people do the things they do, which is very often applicable to business and freemium models like JibJab.

  • http://www.ChannelStack.com/mychannelstack/RVTV RamVaz

    I'd like to take you up on the offer for write-ups. This Week In VC is one of my favorite hours of the week. Let me know which ones you want me to get started with. You can contact me here or Twitter @Mr_RamV

  • Jeff Blake

    Mark,

    I'd be happy to write up some of your episodes for the opportunity to pick your brain regarding my OOH advertising startup, Rush Hour Outdoor. Ryan Born has been telling me that I should get to know you. Please send me an email when you're available – jeff@rushhouroutdoor.com. Looking forward to it,

    – Jeff

  • Chris Stewart

    Hey Mark sent you an email about the notes/reviews.

  • Patrick Skelley

    Mark, I will watch it later tonight (I'm on EST) and about to run to dinner. It's interesting, people force their JibJab videos down your throat, a very addicting site for sure. Oh I'm completely down to do a writes up for you in return for some coaching! This is Patrick Skelley, we've exchanged a few notes recently on Quora, let me know what you need and how to proceed, what a deal!

  • http://twitter.com/ZacharyRD Zachary Reiss-Davis

    I love your offer in the appendix, not because I have time to take you up on it, but because I'd love to read the results! I really post, but tend not to have the time and patience to watch the underlying videos.

  • http://bothsidesofthetable.com msuster

    Awesome! Send me the notes. If they're good I'll publish & link to whatever site you'd like crediting you as the source. Thanks.

  • http://bothsidesofthetable.com msuster

    How about you pick a show other than Howard (already started) and write the notes. Send them to me and if good quality we'll go from there. I know the OOH space well – regardless at some point I'd be happy to discuss.

  • http://bothsidesofthetable.com msuster

    Yeah, lot's of people say that about video. Honestly, they're really good. Most of them anyways. But I like the notes so people who want the “Cliff Notes” version can also get value.

  • http://twitter.com/wfjackson3 Willis F Jackson III

    Mark,

    You thunder stealing jerk! I was going to offer to do write-ups for you to try and keep your attention after SXSW! Back to the drawing board I guess.

  • http://blogs.fluidinfo.com/terry terrycojones

    > Any takers in a trade for helping do some write-ups against whatever you want? Advice, coaching, intros?

    Investment? :-)

  • http://twitter.com/BrowseMob Browsemob

    Dibs on the Yves episode! Give me a couple days and I'll email you my write up. If you like it, we'll take it from there.

  • Nilo Paredes

    As soon as I read why $12 converts better than $9.99, I thought to myself it's the monthly breakdown that people easily/instantly relate to. At my current company, we are constantly adjusting our pricing and one key aspect is the per monthly cost. The other key aspect is the relative pricing with respect to the other products we offer. We drive the user to one or two price points, using the price point as the wedge.

  • Nilo Paredes

    Edit: We drive the user to one or two price points, using the a *middle* price point as the wedge.

  • Sam

    Couldn't agree more. We levelled our web hosting at $120 a year – 10 bucks a month and it works perfectly because our clients associate their website with costing them a tenner every 30-odd days.

  • http://ideatransplant.com Jan Schultink

    I also wonder wether a rounded value just looks more honest to people. $12 i.s.o. $11.99

    Competitive pricing dynamics also plays a role. With these relatively low amounts of money, being the most expensive signals that your service is the best choice.

  • http://quotable-coxswain.blogspot.com Scott Magdalein

    Good for skimming and SEO, too.

  • http://www.hypedsound.com jonathanjaeger

    If you have spare time driving in the car or doing some other activity, there are audio versions of ThisWeekIn shows on iTunes (or just listen to the video versions). :)

  • News Junk

    Public Radio has known this for years……nothing new to this idea.

  • http://bothsidesofthetable.com msuster

    LOL. There's still a deal to be had for one of my longest time readers ;-)

  • http://bothsidesofthetable.com msuster

    Except for 2 things:
    - they tested a bunch of different price points – both round numbers and x.99's
    - historically x.99 has always performed well for companies. people think they hate it (like ads) but it works

  • http://ideatransplant.com Jan Schultink

    OK, I always stand corrected with facts

  • SteveD-

    Hi Mark, I've got a bad case of naive optimism. I think your offer regarding advice/coaching in exchange for a write up may be the cure. I'm looking through the archives now. Will forward when it's finished. BTW, great tip regarding the subscription management systems. Steve

  • Marcin

    As far as frame if reference pricing – for b2b say an activity A involves x people @ $y/hr – would that work as a reference? Eg for less than the cost of a team meeting?

  • http://twitter.com/rkillgo Russell Killgo

    Hey Mark. Solution for your write ups… A stenographer can do it in realtime and it can be saved and printed out for distribution. I was a court reporting student many moons ago. Near the end of school, you have to get live experience without the pressure of being perfect in a courtroom setting. I actually worked with hearing impaired students at University of North Texas going to classes with them and doing closed captioning pg what the prof was saying in realtime while hooked up to their laptops so they could read along and learn in regular classes, not condensed or special classes. I also worked for Lockheed martin doing the same thing in their weekly meetings. What I did there was classified. I could tell you, but then I'd have to kill you. It really doesn't cost much to have someone there, less than $50/hr. and they could have it printed up very shortly after you finish the show.
    Your comment of:

    Evan is artist who is the creative genius who was working with the low-cost film medium in the late 90′s. Gregg is an ex Investment Banker and Wharton MBA. It was a marriage that worked well from day 1.

    made me think of something you said before about hiring people that are good at things that you lack some skill in. I posted a comment on your blog from a few days ago “Should you really be a Startup Entrepreneur?” that I would appreciate your comment on. — Russell

  • SteveD-

    Looks like Brad Feld hasn't been written up yet. Does that work for you Mark?

  • http://pupeno.com J. Pablo Fernández

    I've also heard that numbers with 7s and 9s in them sell more, maybe 12.79 sells more than 12.00; but always test, test and test. That's the only way to find out.

  • http://twitter.com/firstconversion First Conversion

    Seomoz uses a company called SpeechPad.com to transcribe their friday vids. Works pretty damn well. Check todays vid for an example http://www.seomoz.org/blog/int

  • http://arnoldwaldstein.com awaldstein

    Mark

    I've been a fan since the beginning.

    Post raises an interesting question about Vblogging or WebTV (or you choose the name). I'm a big user and keep these video streams diminished on my desktop and open them when something sounds interesting.

    Have you seen or have any ideas on companies or technologies that are cracking the puzzle…that is we love the video stream but it is a black box that requires post indexing to make it really useful over time?

  • http://twitter.com/HumphreyPL Humphrey

    Hi Mark,

    Long time reader first time poster. Its about midnight in Melbourne and just got back from some great Mexican with friends to see your appendix offer but in over an hour I guess I was too late.

    Gregg's answer to questions 9 is about hiring the right staff. Have you heard of or ever used the Top Grading method by Bradford Smart? What do you believe is the best hiring technique when competing against massive wages, kids/mortgage or other developer mates with lifestyle businesses? :)

    I was also wondering if you could please pass on a message to Gregg that “http://www.jimjab.com” and “jimjab.com” fail to resolve to their website.

    Please let me know if there is a episode someone missed would love to help out.

    Many thanks!
    Humphrey

  • http://www.cellarangels.com Martin

    Mr. Suster:
    I'd be happy to provide write-ups on past programs. Since I've only recently (last week) been introduced to you and your material, feedback provided will be from a unqiue perspective and skill set. For example, I've never heard of “freemium” or JibJab, so to say the perspective rendered would be “outside the normal industry chatter” would be a gross understatement. I'd love to help.
    Cheers,
    Martin A. Cody
    Founder
    Cellar Angels, LLC

  • http://www.myr4card.com r4

    Fascinating, truly is. I would always think, selling at 9.99 would be more successful than selling at 12.00 – but clearly I am wrong. I also (very fondly) recall JibJab and their very first video. And amazing spoof and one that garnered a lot of well deserved attention.

  • http://bothsidesofthetable.com msuster

    Good suggestion. Only issue – I don't want a transcript so much as an intelligent summary. re: your question – responded over there. thanks for calling my attention.

  • http://bothsidesofthetable.com msuster

    Thanks! re: what we need – better ability to slice videos into small components, tag and make references to just sections of video. you can do the basics on YouTube but too time consuming for me.

  • http://bothsidesofthetable.com msuster

    thanks, humphrey. will do.

    re: recruiting – I've written about it before but don't remember the exact post. but it's about culture, working somewhere that people are happy, developing skills and increasing financial opportunities as the company grows. and disproportionately reward your top, top people

    re: jibjab – resolves here. Can you please try again?

  • http://arnoldwaldstein.com awaldstein

    This same issue is holding back sharing in the socialTV area. Being able to share pieces of scenes with friends is the language of video and the key to making this work in my opinion.

  • Noname

    Would $2/month be better?
    $2 < the cost of ONE tall latte
    Pricing is all about setting the perception – I think!.
    Experimenting with pricing models in addition to just price points will also give more data points.
    my 2 cents

  • http://twitter.com/HumphreyPL Humphrey

    Hi Mark,

    Sorry I think too many Corona's tonight. JibJab works great. JimJab not so great.

    Thanks for your answer about recruiting. I did do a couple searches before but tried again and found: http://www.bothsidesofthetable…/

    Many thanks and again if you need any more transcribing help happy to assist.

    Cheers,
    Humphrey

  • http://byJess.net Jess Bachman

    I can't wait to watch this one. I love seeing examples of low yearly pricing as it's quite different from the monthly billing that goes on in most SaaS companies.

  • http://www.nathanlustig.com Nathan Lustig

    Great post as always. I'm happy to help with write ups as well, let me know what you'd need.

  • spellett

    Wow I guess I'm too late to take you up on your offer?!?
    What are you specifically meaning when you say you want a write up – transcripts? summary of the show? summary with added commentary and info?
    Let me know as I would like to do a write-up/ summary with thoughts from entrepreneurs trying to move up the learning curve.

    Anyways great post as usual and yours is one of the very few blogs that I print out and read completely.

  • http://www.kidmercuryblog.com kidmercury

    using the crowd to get transcripts…..congrats mark. you're officially a blog star.

    just don't let it get to your head. i don't want to pull up techcrunch tomorrow and read a story about how suster lost his fortune in a sea of sex, drugs, and blogging. there's still a long road ahead of you. badges, susterbucks, etc

  • http://twitter.com/sdesh Sachin Deshpande

    Mark – have met you before at a Twitter conference. I am entrepreneur who sold a video startup to Qualcomm (where I am at currently).

    Happy to write notes on occasion. Just let me know!

  • virtuallybing

    Mark -

    I've been watching your show since Day 1. I used BlipSnips, a Boulder TechStars '10 product, to slice and dice the Chamillionaire episode a while back: http://ow.ly/3QGZh

    I've been considering reaching out to you to see if you'd be interested in such a thing. It'll only cost you a handshake the next time you stop in Boulder.

    I'd be happy to help out if the viewing community would like to see it happen regularly.

  • http://technbiz.blogspot.com paramendra

    Suster, you are quite a storyteller.

  • http://nfisher.myopenid.com/ Nathan

    Were any prices used other than $9.99 and $13.99? I'm curious what impact the number of digits has on the conversion rates. As an example would other single or double digit price points have a similar affect?

    With no proof I'd like to present the following;

    $9.99 despite being less than $12 will have a mental representation that is more complex and therefore less favourable emotionally. I suspect there is no linearity to it, and it is largely dependent on what someone considers to be within the confines of “pocket” change. $99.99 vs $120 may or may not have a similar affect dependent on how freely you part with that kind of money.

  • http://influads.com/ damiansen

    Mark, you said that you were not paid to do the show, but you get way more than that. The join and intellectual challenge of those guys must give you a nice ROI :-) It was very visible at the end that you'd continue forever if the production team let you

  • http://www.muondo.org muondo

    super bravo pour votre blog,il m'apprend des choses remarquables!

  • Jeff Blake

    Sounds great – I've already started on the write-up of the Tom McInerney episode. I should have it to you tomorrow. Looking forward to speaking with you,

    – Jeff

  • Jeff Blake

    Mark,

    Finished the write-up of the Tom McInerney episode of TWIVC. Send me an email (jeff@rushhouroutdoor.com) when you are able, and I'll look forward to hearing your feedback. Thanks again for the opportunity,

    – Jeff