The short tail: Freshbooks simplifies prices, increases business

Posted November 3, 2006

The current received wisdom of the internet? The Long Tail. Amazon and Ebay are providing value because they offer enormous choice. True enough, but only when it’s easy for customers to find what they need.

My local diner - the choices are tasty, but it’s overwhelming:

Skylark menu


Freshbooks (a software company) carefully experimented with customizable pricing and lived to write about it. Reader’s Digest version: they returned to three simple tiers and increased customer conversions 30%.

Banks wrestle with the trade-off of many account types (good price discrimination) vs. simplicity (employees and customers like it). There is no perfect solution, but simplicity sells. In every industry.

One of our bank customers is debating the issue internally right now. Merge obsolete product types (with a few customers still floating around) into fewer choices?

Sounds great, but this means paying higher interest. Some customers are happy in their current low-interest products.

The costs in closing a particular account type can be carefully evaluated. Pricing software can combine the important factors into a dollar figure:

  1. Total Balances: Are there a lot of dollars in these accounts?
  2. Cash Flows: How quickly do balances drop at the current interest rate? How about the higher rate in the new account type?
  3. Alternatives: What does it cost to get this money on the wholesale market?

The benefits are harder to quantify, but still very real. How much does your customer’s experience improve with fewer options? How much do you reduce hassles for your employees with less products?

Bottom line: the best price is critical for profits. But not at the expense of annoying customers.

Keep your offer simple. There are solid ways to price-discriminate in banking (especially on CDs) without ever complicating the offer. And where price discrimination is impossible, maximize profits by finding the best price for all of your customers.

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2 Comments so far

  1. Patrick McKenzie on November 5th, 2006

    I’m not a banking guy but enjoy your thoughts on pricing issues. For those of us who aren’t banking guys, can you explain what you mean by “products” in this context? Is this a product like a checking account or a product like a 6-month CD or what?

  2. mschoeffler on November 5th, 2006

    Sorry for all the banking jargon. The core deposit products are checking, interest checking, money market, savings, and CDs.

    In my mind, a product is any distinct offering from the bank, no matter what it’s called. The bank may have twenty kinds of interest checking accounts, with names like “Preferred Customer”, “Platinum Plus”, etc. - only limited by their marketers’ imaginations.

    Tightly related products (like a 6 month CD and a 1 year cd) are still separate products, but less confusing for the consumer.

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