When it comes to determining acquisition prices, do you recognise this ritual?
A bunch of marketers come together and share their gut feelings about the best acquisition price. Because they all have individual targets, each is making a case that the best price should be in their channel.
The online marketer says the Web site needs the best price because on the Web site there is no possibility for a direct conversation. At the same time, the marketer responsible for sales by telephone argues it would help if the sales agent could offer a better price than the one customers saw on the Web site.
The people selling subscriptions on the streets say it is difficult to grab the attention of shoppers, and they are in the windswept streets of the Netherlands rather than a comfortable office like the telesales reps, so obviously they need a better acquisition price than the other channels.
In the end, we would balance all these interests and agree to a great number of propositions to shoot at potential subscribers. Gut instinct ruled the business again.
Your gut feeling is always wrong
To find the right price for new customers, start by taking gut instinct out of the equation.
Together with Mather Economics, NRC gathered and analysed data about campaigns from the past years — literally hundreds of propositions, prices for many products offered to millions of prospects, and success rates. Statistics and a couple of very smart analysts predicted an optimal price point.
It turned out to be scary and counterintuitive. For example, the product we sold the most was the Saturday hard-copy newspaper combined with digital access on weekdays. We offered it at €14.50 a month. The statistical model predicted an optimal price of €9.
In theory, it would bring us thousands of new subscribers and lots of extra margin. This struck us as wrong because our gut told us we had to increase the price to earn more money. Nobody would care about a couple of euros more a month for our great newspaper, we reckoned. Right?
Gut versus statistics
It’s not easy to work with control groups and analyse the results in real-world, direct-marketing situations. There are always human sales agents involved who do or don’t believe in a certain proposition and are frustrated because they feel they cannot offer the best deal in their channel. This human factor cannot be overlooked.
Luckily, we live in the age of the Internet. There is some great and affordable software out there that enables online A/B testing on real customers by splitting the traffic and showing them different versions of the Web site with different offers. We used these kinds of tests to measure the effect of different price levels on acquisition numbers.
We decided to test the gut against the model and defined a higher price (€17.50) and a lower price (€11.50) for the product. To compare the success of the two price points, we used two KPIs: the number of new subscribers and the forecasted customer lifetime value (CLV) of these subscribers in two years.
We started with the gut price point and implemented the higher price on the Web site in an A/B test against the normal price. After four weeks, we had significant results showing a decline in conversion and a small gain in CLV margin projected over two years — no big surprises so far.
The more interesting experiment was the one with the lower price. While the model predicted big things from this change, we didn’t believe it. We put the lower price on the Web site on a Wednesday, and even as soon as the next Monday, it was clear something spectacular was happening. The number of new subscribers coming in almost doubled.
After two weeks, results were significant, and we were left with a dazzling 81% increase in new subscribers and 38% in CLV.
We unleashed the power of analytics to build new relationships while improving company value at the same time. Our guts felt stupid.