How should a new business price its first product?
That was the question facing Krista LaRiviere, co-founder and chief executive officer of gShift Labs Inc., in 2010, when she launched the company's first product, search engine optimization (SEO) software called Web Presence OptimizerTM (WPO).
A product's price should cover costs, of course, but marginal costs – the additional cost of producing one more unit – are negligible for software.
A product's price should take into account how much rival products cost, but in new markets, there might not be close rivals.
In the early days, a product's price should encourage customers to try it, but then how do you increase the price from a low starting point?
Ms. LaRiviere needed to balance all of these considerations in deciding on an entry price for WPO.
gShift Labs, based in Barrie, Ont., was co-founded in July, 2009, by Ms. LaRiviere and Chris Adams, both serial entrepreneurs and pioneers in the Internet marketing space. Their extensive experience in Internet marketing positioned them well to see new opportunities.
After their previous company, Hot Banana Software, a Web content management solution firm, was acquired by a U.S. e-mail marketing provider in 2006, they started to look closely at existing search engine optimization tools, and realized there was a significant opportunity.
Effective SEO ensures that your company's website comes up early when people search online. SEO is an issue that every company with a Web presence needs to think about, because it answers the question: How do potential customers find you online?
gShift's vision is to change the way people think about and perform organic search optimization.
Ms. LaRiviere believes that SEO campaigns should be just as easy to manage and measure as e-mail marketing and paid search campaigns. The gShift software considers an organization's entire Web presence – not just websites but also press releases, blogs and social media channels such as Facebook, Twitter, LinkedIn and YouTube – and how to improve it for SEO.
The company's software provides marketers and agencies with insight into an entire Web presence, including rank data for keyword phrases, back-linking data, competitive and business intelligence, recommendations, workflow and reporting, all with the goal in mind to rank higher organically in search engines.
The co-founders wanted to target their software primarily to businesses like marketing agencies, digital agencies and SEO agencies, which use it for their end clients.
They also wanted to target professional service firms and business-to-business firms, which use it to improve their own ranking. They had solid relationships with such customers from their previous business, and knew that they would be interested in their new product.
But before launching the product, they had to determine how much to charge for it.
By May, 2010, just nine months after gShift Labs started to develop its software, the company had a beta version of WPO that was ready to launch. Its goal was to get this beta version out the door and into customers' hands as quickly as possible to get information to help improve it.
"We wanted to charge for the beta version, which is a different approach than what's normally done in the software world," Ms. LaRiviere says.
"My rationale was that we knew we'd get better information and feedback on how people were using it. If you give something away for free, there's no commitment in the relationship. People are very quick to say they like something when it's free. But if someone has to take out a credit card to pay for it, it's an entirely different story," she adds.
"Now we have a relationship. The problem was that we really didn't know what the price should be."
On intuition, they decided to try a price of $99 a month to track one Web domain (URL), with up to 50 keywords. It didn't sound too high, and yet it represented a financial commitment.
"It was easy to say 'yes' to," Ms. LaRiviere recalls. "A $100 entry point seems to be something that people could bite off and chew, and it wouldn't break the bank."
They didn't have any trouble attracting customers, and, by August, 2010, three months later, the company was able to raise the price for new customers to $299 a month.
However, clients wanted a new revenue model. Rather than tracking one URL a month, the agencies wanted the ability to track many. That's because the agencies wanted to use the gShift technology for sales and prospecting, to show their own potential customers what they could provide for them.
"To show potential customers what they could provide for them, the agencies needed to test the system with many URLs – one for each potential customer," Ms. LaRiviere says. "A price based on each URL quickly became a disincentive to use the software."
After many conversations with clients and to better reflect the agencies' needs, gShift changed its pricing model, and started to charge on the basis of keywords.
With the new model, a client could buy a basket of keyword rankings a month and use them across an unlimited number of domains. A typical basket for a small business is 300 keyword rankings for $99 a month, while an agency is more likely to pay $499 to get 3,200 keyword rankings a month, as well as white- label reporting so it looks like it generates the reports for its own clients.
Not only is this pricing model more flexible for gShift Labs' clients, it is also more profitable: The new model increased sales, as well as gross profit margins.
Looking back at their pricing decisions, Ms. LaRiviere underscores that they took into account several different factors. "We definitely took costs into account, and followed the norms of the software as a service (SaaS) industry that gross margins should be no less than 80 per cent of total sales."
"We paid attention to our competitors' offerings, even though our four competitors are positioned quite differently from us. Our priority was ensuring that our pricing was simple and straightforward enough to make it easy for our buyers to compare us and instantly see the value – cost and time savings. This is a big advantage of our new keyword-based pricing model."
The lesson from gShift Labs is that pricing is not just an operational consideration for new firms, it is a strategic consideration in entering the market. The company was able to use its beta-pricing model to gain important data about its customers and how to add value for them.
With year-over-year revenue growth of 344 per cent since its start, gShift is on the right track, but Ms. LaRiviere knows there is still some tweaking that can be done.
"As the software matures, we can start to slice and dice it out into modules. We will be able to charge additional fees for advanced functionality. I never stop looking at the numbers," she says.
In 2010, gShift was named startup of the year by the York Technology Alliance, and, in 2011, it was chosen as one of the 20 most promising startup companies in Canada by the Canadian Innovation Exchange and invited to attend the C100 flagship mentorship program in Silicon Valley.
gShift is currently exploring ways to monetize the data it is collecting – and, of course, thinking about how to price these new applications to maximize value for its clients and shareholders.
Special to The Globe and Mail
Becky Reuber is a professor of strategic management in the Rotman School of Management of the University of Toronto.
This is the latest in a regular series of case studies by a rotating group of business professors from across the country. They appear every Friday on the Your Business website.
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