MONETIZATION + PRICING DEEP DIVE

Identifying Optimization Opportunities

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11:28
NOTE: You can identify and analyze customers in each state by downloading the Optimization
Opportunities Template here.

We're talking about defining and analyzing existing healthy customers, and there are four things that
we need to do.

We wanted to first define the existing healthy customer. Second, define the expansion paths that we can
expand an existing healthy customer to. Third, identify candidates for expansion. And then fourth,
understand why those that look like good candidates haven't expanded yet.

In the last lesson we defined existing healthy customers and then defined the potential expansion paths
for them. Next, we'll identify which existing healthy customers are candidates for each of our
expansion paths.
The key point here is that not all existing healthy customers should be targets for expansion strategies.
There might be some customers who are in the right use case with the right level of engagement. Trying
to get these customers to expand can be counterproductive. If we push a customer who isn't a good
candidate, they can find that messaging annoying -- and even if they do expand, they might end up
feeling that they are paying more than the value they are getting, and the new expansion will just end
up churning.

Think about ClassPass as an example. They have four different paid plans. Now obviously the best plan
from the company's perspective is the highest tier, because they get the most revenue from those
customers.

But consider this from the customer perspective. A customer who works out three times a week would
be very happy with the $79 tier, which gives them 12 classes per month.
But if ClassPass was aggressive and tried to upsell them to the highest plan at $139, then the customer
might use only half of their credits. This makes them feel like they aren't getting the value or like
ClassPass isn't worth it for them and they might just end up leaving and churning completely.

You need to have a sense of when to push a customer to expand and when to leave them alone. It helps
us customize strategies to the expansion path we want them to go down.

For instance, when Amazon recommends new paths to a customer, they want to customize it to the
expansion path that is most relevant to that actual customer. A customer that's been buying books on
Amazon might be a good candidate for Audible or Kindle, but not necessarily Amazon Fresh.
To identify who the right candidate is for expansion, we need to look at what makes somebody a target
candidate. There are three kinds of parameters that could influence the target profile. The first category
is the who. Demographic attributes like age, gender, household income can all play a role in whether a
customer expands or not. Families with kids, for example, are probably more likely to use Amazon
Fresh. We can also think about firmographic attributes like size of company, geography, role, industry.
For Eventbrite, event organizers above a certain size are much more likely to upgrade to a professional
use case.

The second category is what they do, or the product actions. This could be a certain level of
engagement, usage of certain features or an action like hitting a paywall.

The third category is the when. External triggers and timing can also influence expansion. Things like
the time of year, and seasonal events. For instance, an existing healthy customer who used Thumbtack
during the fall and winter would then become a prime candidate to expand their usage during the
summer months when they tend to do more home work.

To identify candidates for expansion, we can follow three steps. We first want to define the hypothesis
of who the target customer for expansion is. Second, we want to use segmentation analysis to identify
which elements actually matter. Third, we can overlay a predictive model to validate which attributes
matter most and why. We start this identification process with our hypothesis of what personas and in-
product behaviors our expansion path are built around.

For instance, Figma's organization plan is built around a persona: design teams in companies of 50 or
more employees.
So Figma might believe that customers who have a professional plan with those persona attributes are
most likely targets to expand to the organization plan.

Similarly for Eventbrite, the premium plan is built for organizers that do large complex events, so they'd
look at existing healthy customers on the essential or the professional plan with those attributes as
candidates for expansion.

To validate this hypothesis, we can use a little bit of segmentation analysis. There are three steps in this
process. We can calculate the expansion rate for a specific expansion path. We can then segment results
on various attributes that we think might influence expansion. And then we can identify lookalike
audiences in our existing healthy customer base to identify more of that target profile.
We'd start by looking at overall expansion rate from a base of existing healthy customers.

Here we look at all existing healthy customers as of June 2019. Then we look at how many of those
customers expanded to the organization plan over the next six months. We see that about 15% of them
expanded.

Then we can segment based on attributes to understand how the expansion rate differs based on those
specific attributes.

Some hypotheses we might have of customer attributes that signal they are good candidates for
expansion might be based on a persona like the size of the design team, the size of the company, annual
revenue, industry, and so on. We could also segment based on various product actions, like how many
projects they had created or the number of editors they have.

We first decided to segment based on the size of design team the customer has. Here we can see that
design teams with 11 to 25 designers have the highest expansion rate, and teams with 25 to 30 designers
also have a pretty high expansion rate. This suggests that the size of the design team is one attribute
that might drive expansion.
We can also segment on the number of editors on a team. We see here that there's a clear inflection
point after 10 editors, with expansion rates increasing among teams who have more editors. This makes
sense, because as teams have more designers, they have more editors on Figma, and as they add more
editors they might need more complex features.

Figma could also segment on product actions like whether or not they use a specific feature. For
instance, if they use third party integrations, they might be looking for a more advanced feature set. Or
if they use team libraries, they're probably interested in design system features, which is on the
expansion path.

So Figma might exit this analysis with a hypothesis that the factors that influence expansion are the
size of the design team, more than 10 editors, and specific feature usage around third party integrations
and team libraries.
Once we figure out what some potential triggers are, we can look at our base of existing healthy
customers and identify candidates for expansion. Now, this isn't really a binary yes or no, because we
can't always build a perfect profile.

Instead, we can look at it as concentric circles. The center is the group that is most similar and includes
most of those attributes that you've identified, and as we work our way out, we get less and less similar
from that perfect ideal expansion path profile. Now as we expand out from that ideal profile, our
probability of converting these customers will decrease. So at some point the probability of converting
them gets so low that we probably wouldn't deploy an actual optimization strategy.

For Figma, the highest probability candidates at the center of the circle might be existing healthy
customers with teams of 11 to 25 designers with over 30 editors whose top feature is third party
integrations.
As we expand out, we start to loosen some of these other elements, so the next layer might be
customers with teams of 11 to 25 designers with only 21 to 30 editors who are also using the third party
integration, and so on and so forth.

Until we get all the way out where we might have teams of fewer than 10 designers and editors who are
using the feature of canvas commenting. They are probably the least likely to upgrade to an
organization plan. So Figma may or may not target these with optimization strategies, depending on the
probability of conversion.

Let's look at a different example. For Eventbrite, we start with all existing healthy customers on the
essential plan in June 2019. We look at how they expanded over time and find that there is a 5%
expansion rate.
We can then segment on various parameters to start to look at what influences an ideal profile for
expansion. They could first do persona-based segmentation, like on the annual revenue of the
organizer.

When we look at this segment, we can find some variation. Larger organizers in the 10 million-100
million and 100 million-1 billion dollar range have higher expansion rates than the average of 5%. So
it's possible this could inform one element of an ideal profile.

Eventbrite might also segment on various in-product actions.

Here, ticket sales on their own site stands out with extremely high conversion, followed by adding more
ticket types and customizing the checkout form. So usage of these features might also inform our ideal
profile.

We could also look at a timing attribute, late summer or fall. This is when large outdoor events happen
and so could be a trigger to expand.

So for Eventbrite on the whole, they might believe that an ideal profile are organizers with $100M+ in
revenue that are hitting the paywall around various features like ticket sales on their own site.

Once we have an ideal profile, we would want to look at an existing base of healthy customers and filter
on these criteria to find people who might be good opportunities for expansion.
Once again, we can think about this as a layer of concentric circles. We might start with the ideal profile
of those hitting the sales paywall and having revenue of $100M+. They are probably the highest
probability candidates for expansion.

But we can expand that profile out and start to loosen some of these ideal elements in order to get
additional groups of people who might be good profiles but might convert at a slightly lower rate.

This method of segmentation gives us a good indication of which factors help drive expansion and
hence who possible candidates are. However, it still leaves a lot of questions unanswered, like which
attributes matter more than others. For Figma, is it the number of editors or size of the design team?
Does feature usage matter more than persona attributes?

To get to a very specific level of precision, we would need a more analytical predictive model.

A predictive model would take in all of the data available around who they are, what product actions
they've taken, and certain external triggers. It would then give us two outputs.

It would tell us which attributes or triggers have the highest influence on users' expansion, and which
existing healthy customers have the highest probability of expansion.

A model like this takes quite a bit of time to build and requires some assistance from the data science
team, and as a result, we don't specifically cover it here in this module.

Once we've identified our candidates for expansion, we need to understand why they haven't converted
yet in order to figure out some optimization strategies to deploy.

Lesson Summary
To identify candidates for expansion, we can follow three steps. We first want to define the
hypothesis of who the target customer for expansion is. Second, we want to use segmentation
analysis to identify which elements actually matter. Third, we can overlay a predictive model to
validate which attributes matter most and why.
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