Fortune Favors The Bold

Tumblr Promoted Posts: Exploring Customer Segmentation For Pricing

gbattle:

I’ve written about both forms of Tumblr promoted posts previously.  Tumblr is now in the midst of revenue discovery, where they attempt to put together a diversified revenue portfolio; a mixture of ad, transaction and subscription pricing strategies meant to increase revenue yet decrease revenue volatility over time.  An important tenant of a well constructed revenue portfolio prices goods or services in a manner commensurate with value for each customer segment.

Tumblr is failing to adhere to this last point with its current static pricing model across all customers, where pinned and highlighted posts cost $5 and $2 respectively, independent of value as measured by impact, engagement, or potential reach.  For example, a new Tumblr user with zero followers, myself with 592 followers, and MTV with say 500,000 followers all pay the same price for a pinned post today, but the promotional value for each of us is not equivalent.  There are many ways to solve this issue employing a combination of fixed and variable pricing components.

The fixed pricing component sets the price floor by addressing setup costs and minimum customer value in a single number.  Remember, cost represents not only the price of of setting up the promotion (negligible on an individual basis), but also the price for serving non-paying customers in a freemium model (huge in aggregate).  Similarly, minimum customer value has nothing to do with Tumblr’s cost basis and everything to do with how the paid services are perceived.  For our example, we’ll use Tumblr’s aforementioned current static prices as the fixed component.

The variable pricing component should be dynamic and based upon transparent, easy to understand key performance indicators (KPIs).  For our example, follower count seems to be the best Tumblr KPI proxy for value via potential reach, however Tumblr could also measure the exact impact for each pinned or highlighted post by giving customers exact impressions (# of times the post has been served to unique users) or engagements (# of times a post has been unpinned or likes/reblogs from the pinned position or a call-to-action link within the post has been clicked).  I’ll address Tumblr analytics in a future post.

How do we combine the two components?  Start by creating a frequency by follower count histogram for all 60+ million Tumblr users to understand the universe we are playing in.  There’s enough real customer data today to create another histogram using only actual promoted posts customers.  We’re visualizing the data to come up with a customer segmentation scheme based upon follower count that makes sense**.  Our options could be separating the universe into follower buckets or bins (eg. a descriptive distribution statistic like deciles) each of set price or making price mathematically tied to the exact follower count (eg. CPM).  Given we don’t have Tumblr’s data, let’s go with a modified CPM approach where CPM math only applies for accounts with greater than 1000 followers (I’m assuming most accounts have fewer than 1000 followers).  How you determine your CPM is up to you, but I suggest using data to come up with engagement targets at every follower count, and backing out the number from the targeted pro-rata costs offset by that particular stream (eg. if we’ve set the customer engagement targets at each follower count quartile - 1st is .5%, 2nd 3%, 3rd 2.5%, 4th 1.2% -  and want pinned posts to account for 25% of costs, we can back out the CPM accordingly).

For example purposes, let’s just say our backed out CPM is $3.  We now get the following:

Pinned Post Revenue = Fixed + Variable

Pinned Post Revenue = Fixed + CPM * (Followers/1000) for follower counts above 1000 otherwise it’s just Fixed

For the spreadsheet inclined, it’ll look something like this (zeroes out the variable component for follower counts below 1000):

Pinned Post Revenue = $5 + $3 * ([if Followers > 1000, Followers, 0]/1000)

So, all users with fewer than 1000 followers would pay $5, but MTV, with 500,000 followers, would pay $1,500.  This pricing model now seems reasonable and commensurate with customer benefit.  Additionally, the above complexity can be clearly messaged to the customer via a singular number with a simple explanation.

The number of levers available for customer segmentation pricing are numerous.   To keep things in perspective, when exploring pricing, just recognize that product and revenue portfolio design go hand-in-hand to drive value at a premium.  You can alter any aspect of either to achieve your goals, just err on the side of messaging clarity on behalf the customer and fiscal sense on behalf of your costs.

===

** A deeper analysis would be a histogram of Tumblr Notes actions by position in the stream - 1st, 2nd, 3rd, 4th, etc.  This way, you can come up with real data regarding the “lift” from a pinned or highlighted promotion by comparing apples to apples.  What better way to market the value f promoted posts than revealing the value.  Eg. “Pinned posts receive, on average, 350% more reblogs, 500% more likes and 200% more replies than unpinned posts.  Highlighted posts receive on average 50% more engagement against posts in their same position in the stream.”

I admire your hopeful assumption that anyone at Tumblr is someone who is capable of doing any of this rather than skateboarding around the office all day or taking pictures of themselves with their coworkers’ dogs.