Tuesday, January 11, 2011

To ask or not to ask (for the user's credit card), that is the question

I've just answered a question on Quora and thought it might be worth cross-posting it here. Just in case there's still someone who isn't using Quora yet (admittedly unlikely given their current growth rate which is absolutely incredible).

The question was:
"For web apps, is it better to ask for the credit card before their trial starts (e.g., on the signup page) or after their trial expires?"
My Quora answer follows below.

* * * * *

I don't know the answer, and there probably is no general answer, but I recently put together a little model that helps to understand the determinants better:

Click here to open the Google spreadsheet

The blue values are sample (dummy) input values that you can change. The model is based on the following ideas and assumptions:

  • There are two types of visitors: Those who sign up whether or not a credit card is required (let's call them Group 1) and those who sign up only if no credit card is required (Group 2). There is of course a third group, those visitors who don't sign up in neither case, but we don't need them here.
  • If you require a credit card you have a certain visitor-to-signup conversion rate from the users of Group 1 (cell D8 and D32). And per definition, no signups from Group 2 users in that case (D33). If you move to a no-credit-card signup, on top of the signups from Group 1 (D9 and E32) you get a certain amount of signups from Group 2 users (E33) so your total visitor-to-signup conversion rate is higher (E34).
  • Looking at the trial-to-paying conversion rate, let's assume there's a baseline conversion rate of Group 1 trial users in the CC-required case (D12 and D38). If you remove the CC requirement I would expect that rate to drop (D13 and E38), because a) trial users who have provided their CC already may feel higher 'pressure' to try the product within the trial period, they feel more 'invested' and are less prone to procrastination; and b) doing nothing is easier than actively terminating your account. Some users will forget to terminate or just don't care.
  • Looking at Group 2 users, again of course no signups or customers in the CC-required case. In the no-CC case you'll be getting a certain amount of trial-to-paying conversions from those users (D15 and E39). I would expect that rate to be lower than the baseline conversion rate because Group 2 users are, on average, inherently less interested in your product than Group 1 users (more tirekickers).

So far so good. You can see the number of paying customers for each of the two cases in row 40.

The next thing to look at is churn, i.e. users who cancel after you've charged them at least once (I'm using charged-at-least-once as the definition of a 'paying customer' in the model):

  • I would generally expect the churn to be higher in the first few months following conversion to paying because some users may still be in their 'extended trial period', even if they're paying already. Also, the longer your customers use your product, the more value they will hopefully derive from it so they get less and less likely to cancel (D19 vs. D 21).
  • In the CC-required case I would expect that difference in early churn and later churn to be higher, maybe much higher, because many of the users who forgot to terminate within their free trial will terminate within the first months after subscription (D18 vs. D20).

Using the data on customers, churn and your revenue (or gross profit) per customer per month you can now calculate if you're better off requiring (D48) or not requiring (E48) a CC upon signup. One last factor that I've included is the cost that it takes to serve a trial user, e.g. bandwidth and time from your support team, which may or may not be significant depending on the nature of your business.

There are of course a couple of caveats:

  1. The sheet is completely useless until you've tested it and until can fill it with real data. The purpose of the model is NOT to replace real-life testing by making some assumptions and pretending that that lets you decide which option works better. Quite the opposite – the purpose of the model is to understand which parameters you should look at and measure.
  2. The model doesn't include all factors which may be relevant (their relevancy depends on your business, and I didn't want to make it too complex). For example, one question is if you consider tirekickers an asset (because even if they're not interested in buying your product yet, they may tell their friends about it or come back to you later) or a burden (because they divert resources away from the more strongly interested prospects). Another factor that I haven't included are different pricing plans – I've included just one price per customer per month.

Feedback very welcome!

Monday, January 10, 2011

Portfolio Update Part 4

Here's the fourth and last part of my 2010 portfolio update. The first three are here, here and here. The last (but definitely not least) update takes me back to Berlin, which is not only home to my portfolio company Momox, covered in the first update, but also to another great company that I've invested in together with XING-founder Lars Hinrichs: samedi.

samedi offers a SaaS booking and resource planning solution for doctors in Germany. In some ways, samedi is doing for physicians what Clio is doing for lawyers – provide an easy, secure way to manage your practice from any device that is connected to the Web. Using samedi, physicians and clinics can also easily offer their patients a way to conveniently make appointments online, 24 hours a day, 7 days a week. samedi also allows healthcare providers to optimize their practice workflow using a simple ERP solution and lets practices, health insurance companies and other players in the healthcare industry collaborate online.

Bringing the healthcare industry, which at least in Germany is pretty old-school and bureaucracy-ridden, into the Cloud age is a very tough nut to crack but there's a huge reward for the company that pulls that off. And if there's anyone who can do that, it's the founders of samedi, Katrin Keller and Dr. Alexander Alscher who have the relentless persistence (and the ability to do with very little sleep) that is necessary in that market. After a slow-ish start in 2008 and 2009, samedi started to take off in 2010. Having grown revenues six-fold in 2010, samedi is now used by more than 2,000 physicians and other health practitioners to manage more than one million patients. Thank you, Katrin and Alex, and on to a great 2011!

This was the last part of my little series. My other investments have not or not yet been announced, but expect to hear some exciting news pretty soon!

Tuesday, January 04, 2011

Portfolio Update Part 3

Here's the third part of my 2010 portfolio review. If you're new here, please start with part 1, move on to part 2 and then (hopefully) return to this post.

The next stop is Crakow in Poland, home of inFakt.pl. inFakt.pl was founded in 2008 by two extremely sharp students of the Cracow University of Science and Technology who wanted to build a simple, easy-to-use, web-based invoicing and billing application for small businesses in Poland. I invested in the company together with Team Europe Ventures early last year.

2010 saw the company dramatically expand its product offering to become a complete accounting solution for SMBs in Poland and grow the team from just five people at the beginning of the year to 14 today. To date, more than 80,000 companies have signed up for the software, which is marketed using a freemium model, making us the largest provider of our kind in the Polish market. Dziękuję bardzo, Wiktor and Sebastian, and congrats on a very successful year!

Another investment that I made in 2010 is Propertybase. Propertybase, based in Munich, offers a simple-to-use yet powerful software solution (do you see a pattern here?) for people in the real estate industry. It offers real estate developers, agents and brokers a complete CRM solution which allows them to capture leads, create sale and lease offers and agreements, manage listings, track payments and more. Since the software is entirely web-based, users can enjoy all the SaaS advantages that make the movement from on-premise to on-demand so irresistible: Never worry about updates, backups and security, access to your data from anywhere, easy integration with other Cloud-based offerings.

Apparently the real estate industry worldwide has been waiting longingly for a solution like this: In 2010, Propertybase won customers from more than ten countries and four continents and grew its customer base by more than threefold. And our customers really love us – so far our churn has, amazingly, been zero. Thank you, Mike and Max, supa g'machd!
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