The dynamic pricing game – where all is not 99c

Phil Libin the effervescent CEO at Evernote made headlines two days ago when he admitted that Evernote’s pricing strategy had been a bit arbitrary and a new pricing scheme for their premium offering would be launched come 2015. Although little was said about what the approach would be – I do hope it points to adopting a flexible pricing approach, and serve as a forerunner for pricing strategies to legions of firms down the road.

To put some context, many software providers (especially app companies) have adopted a one price fits all approach; i.e. if the price for the app is $5 per month in USA, the price is $5 per month in India. The argument has typically been one of these

1. Companies such as Apple do not practice price differentiation around the world, and yet they sell – so we should also be able to do the same
2. Adopting a one price fits all approach streamlines our go-to-markets and avoids gaming by users
3. It is unfair to users who would end up paying a premium for a product which can be sourced for a cheaper price elsewhere

From a first hand experience I believe that such attitudes have proven to be the one of the biggest stumbling blocks for firms to achieve global success. A good way to explain why is to pry apart these assertions.

• The Brand proposition argument – Although every firm would love (and some certainly do in a misguided manner) to believe that their firm has a premium niche such as Apple – harsh reality points in a different direction. There are only two brands who top $100 bn – and Apple is one of them; and no – unless you are Google, you are not the other! Even though your brand may be well known in your home of Silicon Valley, its awareness most likely diminishes with the same exponential loss as a mobile signal – its value in Moldova for example – may be close to zero. This simple truth is that there are only a handful of globally renowned brands (e.g. Apple, Samsung, BMW, Mercedes, Louis Vuitton etc) which can carry a large and constant premium around the world.
• The “avoid gaming” argument – this does have some merit, but needs to be considered in the grand scheme of things. Yes – this is indeed possible, but is typically limited to a small cross section of users who have foreign credit cards/ bank accounts etc. The vast majority are domestic users who are limited to their local accounts and app stores. The challenge here is to charge the same fee irrespective of the relative earning power in a country. While an Evernote could justify a $5 per month premium in USA (a place where the average mobile ARPU is close to $40), it is very hard to justify it in South East Asia (mobile ARPU close to $2) or even Eastern Europe (mobile ARPU close to $8). It then would simply limit the addressable market to a small fraction of its overall potential – and dangerously leave it open to other competitors to enter.

ARPU	$12.66	$2.46	$11.37	$9.20	$48.15	$23.88	$8.77
Region	MENA	APAC	Oceania	LatAm	USA	W.EU	E.EU

• The unfairness argument – also doesn’t hold true. The “Big Mac Index” stands testament to the fact that price discrimination is an important element of market positioning.

Even if you argue that you cannot buy a burger in one country to sell in another, the same holds for online software – take the example of Microsoft with its Office 365 software product, same product – different country – different price.

• That brings me back to the final point – $5 per month may sound like a good deal if you are a hard core user, but if you compare it with Microsoft Office 365 – which also retails at $5 per month, it is awfully hard to justify why one would pay the same for what is essentially a very good note taking tool.

Against this background, I do welcome the frank admission that this strategy is in need of an update, and also happy to hear that the premium path isn’t via silly advertisements. Phil brought up a good challenge with his 100 year start-up and delighted to know that he still is happy to pivot like one.  I do for sure hope that the other “one trick pony” start-ups learn from this and follow suit.

Bevation – A canary for corporate incubators?

A few weeks ago, my attention was drawn to a small post within Gruenderszene – that of the quiet exit of Bevation, the incubator hosted by Bertelsmann. The exit was so swift, that even the landing page has by now disappeared into cyberspace. This article, coupled with a previous editorial on the same site highlighting the harsh downsizing of other smaller private incubators in 2013 made me speculate where the fortunes of the corporate incubator lay for 2014 and beyond. Was Bevation the proverbial canary for the Old Economy Corporate Incubator as an industry, or was it more as an exception than the rule?

To be fair, the aims and objectives of Bevation had all the makings of a corporate PR exercise, with words such as “innovation”, “exchanging ideas”, “providing insights” liberally interspersed within their vision. My experience has shown that more vague the objectives, the increased likelihood that you will fall short of those objectives. In addition, although Bertelsmann did provide space, facilities and mentoring it stayed away from capital investment. Given that they have a lot of prime real estate in Berlin this would be a cheap way of getting into the startup scene and checking it out, with limited risk. My hunch is that as corporate priorities changed, and management didn’t see any “wow” outcomes interest withered to the point where the validity of its existence itself was challenged. Notes posted on the website of incubated startups such as Snoopet point to this situation. Management was perhaps expecting the next Google or Facebook – what they got were a few startups, some with even unclear business models.

Will this be the same fate for the other corporate incubators? Many of them are doing a lot more, including investing badly needed seed capital in their startups. However, at the same time all of them do need a few heralded and publicized exits (or at least “BIG story”) to validate their approach and business model. In the end it all boils down to some hard decisions – why are we doing this? Is it for revenue, image… or something else (and this something else better be tangible!). If revenue – are we giving the unit sufficient runway to achieve this rather than a quarter by quarter evaluation approach? If image/ PR/ branding – have we achieved this, and is this achievement recognized and aligned with the interest of the management?

My gut feeling is that those that can objectively answer these questions will survive; perhaps even emerge stronger (and better supported) than ever. Those who operate in a wishy-washy environment may be better of in taking heed to the message of the canary…

Corporate Venturing – Boom or Bust

Hardly a month goes by when you do not hear of an announcement of another large corporate jumping the venturing bandwagon. Like all things, this seems definitely the ‘in’ thing at present. No CEO would want to be caught dead on the ‘what are you doing for innovation’ question – a corporate venturing, whether as a incubator or an accelerator program seems to be the way to go. Depending upon the amount of spare cash they have – fancy offices are opened in Silicon Valley; if you have smaller budgets – then you need to make sure you at least have a prominent location in your home turf.

Although I readily admit I have no statistics to determine whether we have seen any real ‘successes’ from these endeavors, but from the murmurs I hear from insiders, and from some startups who have gone through the process – there seems to be a ton of hot air. There are several reasons for this – but I want to put some thought on the basic structural issues.

For most if not all – this is not a management priority. Sure, you definitely see the entire management with all smiles for the inauguration event, but dig deeper and one realizes that this is perhaps only of peripheral interest. Whenever such a situation occurs, this is a disaster waiting to happen. At every downturn, or ‘consolidation’ in management speak the incubator runs the risk of having its funding severed – cutting the very lifeblood it needs to survive.They are typically managed like the large parent. Many corporate incubators, although starting with the promise of being independent  in the end are closely managed – and in many times staffed by personnel from the parent. While in theory this is not such a bad thing, reality is that a startup, seed business is very, very different from the life at a corporation. What you hence end up receiving is either too many processes or procedures, or some cut & paste lean copy of existing corporate structures (this is what the management is comfortable with remember!). This to a large extent, serves to burden the startup – at worse, frighten away good ones.

What it does do however -seems to boost the rating of the company, in particular its management in front of its share-holders. Who doesn’t like an ‘innovative firm’

The result is that many of these firms literally spend a good deal of money publicizing themselves. Maybe this is a strategy which does help the company’s share price!

The management at these corporate incubators receive a salary…. why is that important you ask? well – i call it the ‘getting wet’ problem. Managers are made just too comfortable in the venture. This makes them less likely to take risks – since well, they don’t have anything to loose. Behavioral science teaches us just that, people fear losing a lot more than they enjoy winning. Try asking a corporate venturing manager to take a Euro 10K salary per annum – with the possibility of an endless upside (and downside) … you get the story

If these hypothesis are right, it does lead to the credible possibility that many of these ventures are on life-support, rather than thriving. And worse still – at the sight of the next roller-coaster ride in the economy – many will simply be left to rot. Pity – given independence, a strong (and incentive driven) management and the freedom to fly (even at the cost of cannibalizing the parent) – we may yet see a jewel emerging from this.

Have to admit – I do not want to be a naysayer here, but if things do not change, and soon…. it may only be a matter of time….

The (un)manager – lessons from Zygna and Twitter

The past few months have seen some of the new found darlings of the Web 2.0 generation literally getting their dirty laundry displayed in the open. When all was going well, these very people couldn’t do anything wrong adorning the front pages of all magazine with adulation including ‘whiz-kid’ to most ‘smartly dressed executive’. One would ever wonder if they had some super-human element in them. However, as their companies faded the reality was starkly revealed. I do not condemn these folk, from an outsider’s perspective it is quite difficult to understand why they did what they did – but perhaps, it does serve as a learning for some of us in the future.

Let us start with Marc Pincus. When Zygna’s star was rising he was the the man with the vision, the man who couldn’t take a mis-step. But then some details popped up that left me puzzled. For starters, the manner in which he dealt with a few key executives by clawing back shares pre-IPO. When you join a start-up a big hope is to hit the jackpot when you go IPO, not sure how it would have felt if suddenly you realize you are back on the street where you started. More so, how would the other employees have felt – would they ever trust the guy who hired them in the first place for not doing so. And then, post IPO, immediately cashing out on a significant portion of the stock. Does speak volumes for the long term success of the company. In reading through blogs, and more interestingly the readers comments you come to get a flavor of the problems at Zygna. No clear strategy, a company where Marc pushes people to perform, tries to compartmentalize innovation and force design of the next big Farmville, disillusionment from its designers, more firings….. seems to be like a vicious cycle.

The next would be Jack Dorsey of Twitter and Square fame. I will admit that I do admire his products, especially Square but behind that blue eyed boy is apparently a person you do not want to see the bad side off. So much so, when he came back to spend more time at Twitter (after divving up time between Square and Twitter) the developer team was up in arms due to his abrasive style. No wonder, in a short span of time, he was ‘coaxed’ to renege his role towards a more passive capacity.

This does bring me to the crux of the issue. Sometimes managers do need to force the issue, but many a time they need to master the art to convince. Just because you are smart, there is little (or perhaps even negative) benefit in thinking that it has to be your way or the highway. This is especially true in the new age industries where good talent is scare and firms are ready to pay top dollar to lure away good people. These people work because they like the subject, the money is good – but indeed they have other avenues to earn the same. Treating them as crap, or behaving in an arbitrary, high handed manner doesn’t get you any brownie points. If anything, you need to be thankful that you do have the super-star developer in your team – else he may just have been sitting with your competitor. And finally, whatever you do – do think two steps ahead. I am not sure if Marc even thought of what the ripple effect would be if he took back shares of  early employees pre-IPO. Would a few millions here and there have dented his wealth? Would some goodwill have helped retained some of his key people, and perhaps attracted others?

In the end, we will not know – but as is painfully seen, down the line, the efforts of your past will either bear you rich dividends, or perhaps lead you to the path of despair.