Mike Arsenault was the product manager of Spreadable, a powerful word of mouth marketing tool that was developed by the Grasshopper Group. The company, which is lead by David Hauser, has been building products that make it easier for entrepreneurs to start and grow their businesses. The parent product Grasshopper.com – a virtual phone system for entrepreneurs is their most popular and reputed product and serves over 100,000 entrepreneurs. With Grasshopper.com’s enormous success in its kitty, the Grashopper Group launched Chargify – a Recurring Billing System for entrepreneurs, which is also doing pretty well. However, they couldn’t achieve similar success with Spreadable and they had to shut it down.
We at Foundora were excited to see how Spreadable would evolve over time, ever since David Hauser had mentioned about it in his interview with us. But, when we heard about its shut down, we were simply curious to know how it happened, what went wrong and more importantly learn from them. We reached out to Jonathan Kay, the Ambassador of Buzz at Grasshopper and got an interview arranged with Mike to speak about the Spreadable story.
In the interview we try to learn from Mike how Spreadable happened and the reasons for the failure, his lessons learnt and a lot more.
Spreadable was a referral marketing tool that helped our customers create tell-a-friend programs for their businesses. Using the app, our business owners could create a customized referral form that allowed their happy customers to share a customized offer with their friends. Our customers’ fans could share that offer with friends through email or through a variety of different social tools.
Spreadable tracked all of the referrals being sent and what actions were taken when the referees received them. After setting up their referral form in the app, our customers could implement an embeddable version of Spreadable on their web sites or link to a referral page that we hosted for them.
We were trying to solve three big problems: 1) People find it hard to ask satisfied customers for referrals 2) It’s hard to quantify the impact that referrals have on your business 3) Developing a referral program from scratch takes significant time and effort.
A couple of years ago, we faced the same set of problems for Grasshopper (our virtual phone system product). We knew we had a lot of passionate customers who were referring us to their friends, colleagues, and family. On any given day, around 40% of new sign ups were saying that they heard about us via word of mouth. So the question became, how can we get more of our customers to share Grasshopper with the people in their network?
We experimented with a bunch of different referral platforms and none of them really did what we wanted – so we built our own. What became the “Refer an Entrepreneur” program for Grasshopper was actually the first prototype of Spreadable. We realized that the powerful thing about referrals is that they don’t come from an organization; they come from some one you know and trust. People are much more likely to open an email from a friend and take action than they are for standard marketing messages.
The Grasshopper referral program was such a huge success that we saw an opportunity to systemize the program we had built and turn it into a SaaS platform.
Okay, so Spreadable was born out of the success of “Refer an Entrepreneur” feature on Grasshopper.com. So, once you guys decided to build Spreadable as a service, did you start talk to people about it(custdev) or just went on with the assumptions that if it worked for you it would work for others too?
We just started building. This was probably the single biggest mistake we made. We made the assumption that since our program worked so well for Grasshopper, we could just port over the same functionality to Spreadable. There were major problems with that logic. First, very few of the customers who came to us had businesses like ours. We learned later that there is actually a threshold in terms of customer count for a Spreadable powered referral program to be successful.
Second, we missed several key components of the actual problem people wanted to solve. We found this out later when we started talking to customers and had to backtrack on our development roadmap.
We did spend some time looking at other competitive offerings that were out there. What we saw were several players in the enterprise space and many small apps that didn’t have great brands.
Prototyping, yes. Rapid, no.
The first version of Spreadable, which was eventually completely scrapped, took about 3 months to build and wasn’t shown to anyone outside of our internal team during the development process. We scrapped it because we weren’t happy with how the app performed. This in itself was a big mistake. We would have greatly benefited from getting something in front of customers earlier despite the fact we were a little embarrassed by it.
We got a little bit smarter the second time around and built a small group of brand loyalists to get feedback from. However, we waited far too long to engage this group of people and the results still weren’t great.
The second version of Spreadable was over-complicated and confusing for a lot of our new customers. We had issues with duplicated functionality throughout the app and the user experience just wasn’t good. The experience was the result of 1) Not learning enough from customers and identifying what core set of features were important and 2) Not working with real UX designer early in the process. We called it an Minimum Viable Product, but there was really nothing minimal about it. It was a mess that resulted from design by committee and a lack of real understanding about the problem we were solving.
In terms of man-hours and marketing, we spent over 500k to bring Spreadable to market.
Spreadable had the pre-launch landing page up for a good amount of time. Were you guys building the product and test it internally only or were you doing alpha / beta testing with external users simultaneously?
While the landing page was up we weren’t testing with any outside users, just developing internally.
When we started charging real dollars at the beginning of 2011, we launched with a fairly straightforward pricing model: Two plans, monthly and annual, $49 & $489, respectively. Conversion was unacceptable using this model, so began a barrage of experimentation to improve it. Pricing was really just one part of the experiments we were running.
From January 1-March 1, we churned through multiple marketing site mini-redesigns, a full redesign, a copywriting overhaul, seven different iterations of our sign up flow, five price changes, introduced a free trial, and produced a three minute video about the product. Here are the big pieces of learning we took away in terms of increasing conversion:
Launching with two plans seemed like a simple way to present our product. We learned a lot about pricing strategy as our market invalidated that assumption. There were two big takeaways:
First, prominently displaying the annual plan at $489 on the first iteration of our pricing page deterred many new customers from signing up. $489 is a scary number for most folks and it wasn’t immediately clear that this was for a yearly subscription. The visual emphasis was in the wrong place.
Second, when we launched a pricing page with multiple plans, we saw a notable increase in conversion. In fact, the increase can be attributed to a theory called anchor pricing. The high level idea behind anchor pricing involves setting a potential customer’s “anchor” at a higher price than what you actually want to charge them. In our case, we set our anchor at $199 for a monthly plan with some additional features. In reality, we didn’t expect anyone to sign up for it.
Not only did overall conversion increase, but we saw about half of customers signing up on the middle and top tier plans. Had we scaled the business and kept the same sign up mix, it would have meant a substantial increase in revenue over the old pricing model.
Observing the change in sign up mix from the pricing model shift, I wanted to dig deeper into the thought process of people signing up on our more expensive plans. There were a couple of differentiators between each plan, but I wanted to find out what was motivating the people who signed up on the Grow or Max plans.
It turns out that the absence of certain features on the lower tier plans really wasn’t it. Instead, it was the fact that we were throttling the right key activity across the plan mix: Referrals.
By capping the number of referrals you could theoretically receive, people instinctively chose the plan where they believed they would never have to worry about missing out on receiving a referral. Since in most cases a referral was worth more than the $25 difference between Start and Grow, people felt more comfortable paying for that security.
The Power of Video (or lack thereof)
As we struggled to get conversion up to an acceptable place on the marketing site, we learned from many potential customers that it just wasn’t clear what Spreadable actually was. To remedy this, we made some significant copy changes to the site and hypothesized that a short video would go a long way in explaining our product and increasing conversion. We looked into working with a couple of the well-known studios in the space, but quickly realized that price was going to be an issue. So, we started hacking a solution instead.
We used Mechanical Turk to transcribe the audio of four product videos we really liked and then dissected each script to find out what made them so good. We discovered that there was a pretty consistent framework used throughout all of them and set out to develop a script of our own.
When the script was done, we worked with a talented motion graphics designer to bring the video to life. When it was done, the reaction we got from people was that they finally got Spreadable and the value it could create for their business.
Despite the reaction, the video didn’t have the effect on conversion that we expected. In fact, it had the opposite effect. After adding the video to our primary landing page, conversion went down. There are too many potential reasons to guess at why this occurred, but the key learning here is that people had a better understanding of our product and still didn’t sign up. This served as another red flag as to why this market may not have been right for us.
Earlier I wrote about how impactful moving to a three plan mix was on conversion. Well, guess what? We didn’t actually have any of the features advertised on the more expensive plans. We were faking it.
While we were actively working on those features, putting the new pricing page out there was really a big experiment. As I explained earlier, we had hypotheses around the effectiveness of throttling and the plan mix itself. If we had launched the three plan pricing page and continued to see dismal conversion, we would have had a very different problem to solve in terms of our product offering. Instead, when we launched the new page conversion doubled.
I get some funny looks from people when I tell this story. In some ways, it feels a little bit dishonest to be selling something you don’t actually have. But imagine the alternative. You spend all of this time and money on a product that no one wants, when you could have simply created a pricing & sign up page to tell you if anyone would have bought it.
We didn’t actually take anyone’s money either. If a new customer signed up on either Grow or Max, I personally reached out to them and refunded their first month. I thanked for them choosing us and explained that I needed their help to shape our future offering. I enlisted them as an advisor and used their expertise to help us build a better product. I didn’t get one negative reaction from a customer.
In your experiments, you may not have such a forgiving customer base. In those cases, just apologize and make it right. There is only one thing a customer likes better than signing up for your product and having a great experience, and that’s being apologized to and having a situation rectified.
We worked on the app from May of 2010 until the end of March 2011. In the three months that we were charging for the service we had 361 paid sign ups.
Our customers liked product, but I wouldn’t say they needed it. There’s an important distinction there. It goes back to the vitamin vs. pain killer analogy. Pain killers solve issues that cause real discomfort for people. Spreadable was a vitamin for the simple fact that most businesses won’t die because they don’t have a referral program.
While we had focused so heavily on the solution (the referral form and its various implementations) we learned from customers that that was really only one part of the problem.
The real pain for a lot of people was around thanking their best customers for making referrals. What they wanted was a very a lightweight system to incentivize people to make referrals on their behalf. Customers wanted to reward their customers with small tokens of appreciation like gift cards or branded t-shirts. Affiliate programs were too much of a hassle and asking your best customer to be an affiliate just doesn’t feel right. They saw Spreadable as an alternative. Since we hadn’t learned this early on, Spreadable wasn’t equipped to solve that problem for people when we launched.
1) Not talking to customers early in the process. We didn’t really understand the problem that we were trying to solve until much later in the process. From the very beginning we were way to solution focused and never took a step back to understand what our customers really wanted to achieve. We put too much faith in our own referral program, believing that if it worked for us, it could work for anyone.
2) Being too aggressive with marketing dollars/PR/Buzz before product/market fit. We spent a significant amount of time reaching out to the press and trying to build buzz, but the product really wasn’t at a place where it should have been getting covered. We made the mistake of thinking that a marketing launch and a product launch needed to happen at the same time. This also put a lot of unnecessary stress on our development team as we increased pressure on them to meet these artificial deadlines.
3) Re-architecting our platform to accommodate power users. Right before we started taking paid accounts, we made a critical decision to fundamentally change how our widgets rendered on customer websites. Without going into too much detail, we removed the iFrame that the referral form rendered in and directly injected the form’s HTML & CSS into the customers’ website. Though it gave power users the ability to more directly manipulate the visual look of the form, it created a massive support burden for us.
One of Grasshopper Group’s core values is “Always Entrepreneurial”. What it boils down to is that everyone in our company is always looking for innovative ways to solve problems: whether it’s in our everyday work or launching a new business like Spreadable.
Part of being an Entrepreneur is knowing when an investment, time or money, isn’t the right investment to make. There wasn’t one standalone reason why we made the decision, but a combination of many that led us to shut Spreadable down and refocus on our other products. In summary:
- The market for a word of mouth marketing tool is significantly smaller than the markets our other products reside in
- Spreadable was best sold in a way that is not a core strength of Grasshopper Group
- Cost per acquisition and customer payback were too high to scale
- There was little confidence that a large investment in Spreadable would have yielded a return equal to a similar investment in our other products.
This was by far the most rewarding experience of my career. I got the opportunity to work with an outstanding group of people to launch a new business. I not only learned a lot personally, but we learned even more as an organization. From that perspective, this process will change the way new products are conceived and launched at Grasshopper Group.
We’re focusing on our other two established products, Grasshopper and Chargify, in the near term. Chargify is quickly becoming one of the most robust recurring billing platforms out there and we’re building on a new suite of mobile apps to complement Grasshopper.
We’ve also got a new product launching soon, which we’re hoping changes the way people think about surveys. Stay tuned.
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