Want to know why charging $12 / year converts higher than $9.99?

As many of you know I run a weekly webcast called This Week in VC that’s getting between 25–35,000 weekly views across ThisWeekIn.com, YouTube & mostly iTunes.

Yesterday’s show floored me. I consider Gregg Spiridellis a good friend. We’ve hung out periodically over the past few years and I have enjoyed debating many startup topics. Yesterday, we got them all on record and in a very interesting level of detail. If you have or are thinking about a business in the video space you’ll enjoy hearing from Gregg but even more broadly this is a great conversation for entrepreneurs, investors or industry analysts. Here’s the link.

This video discusses issues like:

1. Why do a freemium model?
This is to drive marketing and any IT or infrastructure spend can be seen as such. Your goal is to increase the top end of the funnel (more people using the free product) and increase the rate of conversion to paid. In many freemium business this conversion is in the single digit percentages.

2. How did you determine the right price points for your product?
Like many companies they experimented with many pricing models. The first did a “purchase credits” model like iStockphoto where you then burn down the credits you bought. They realized for them this was dumb because people didn’t want to use up their credits so viral adoption wasn’t happening quickly enough. They switched to a flat rate model and sharing went up immediately. They tried lots of price points — $13.99, $9.99 per year — and nothing was amazing. When they increased price from $9.99 to $12 conversion went up!

Gregg says at $9.99 there was no frame of reference for the value. At $12 / year he was able to frame users with the thought, “Am I getting a dollar of value per month from JibJab? Sure, of course I am. Sign me up.” Awesome. Counter-intuitive. The kind of thing you only learn by doing and testing. My key take away — frame of reference in pricing is important.

3. How has the viral coefficient been for you?
Gregg gave us specifics on how viral adoption has worked. He started by using email (send your eCard to a friend) and there he sees 3–4 clicks back per share action. He then was one of the first people to implement Facebook Connect. The viral adoption went to 15–20 per share action. The bigger aha was using the information from the social graph to drive marketing. If he can tell you when your friends birthdays are via Facebook he can drive eCard shares. This has been a phenominal part of his recent success.

<Small plug> — I invested in an awesome company called … awe.sm … that is a performance tracking tool that let’s you measure efficacy of channels like this (email, facebook, twitter, linkedin, etc.) as well as what drove the success of the campaigns. They’ve worked with a few small companies like Zynga, Playdom, GroupOn and TopSpin Media. If you have this sort of need — check ’em out. </end of plug>

4. What is the mix of revenue between ads, subscriptions, digital downloads & ecommerce
My favorite quote of the show, “Gregg, what’s the mix of revenue types?” His response, “I’m not going to break it out exactly but let’s just say the subscription portion looks like PacMan. I can’t tell you how big the mouth is. But it’s PacMan.” I forgot to get him on record on the show, but Gregg writes all the lyrics for the big presidential videos they’ve done — you can see where the humor of JibJab comes from.

JibJab doesn’t do ad revenue at all. Tune into the show — we get into a long discussion of eCPMs on YouTube, his history of ad / revenue shares and why he believes it isn’t the right model for JibJab.

5. How did you go viral initially?
All viral adoption starts with one thing — great content. That’s what JibJab focused on. They never did any PR or marketing to get their videos to first get shown on the news during the 2000 election. They did a rap battle between Bush & Gore — I tracked it down. LOL! I hadn’t seen this before. Click image below if you want to laugh for 1:53. This is where it started blowing up.

And I’m sure everyone remembers the video that put them on the map — the one I first saw — which was the Bush/Kerry video This Land is Your Land (“you have more waffles than a house of pancakes), which was part of the 2004 elections and both candidates were asked about while they were campaigning.

6. How did the Introduction of YouTube affect your business?
It changed everything. JibJab has an ad model that relied on exclusive distribution deals with the big portals. In 2005 they realized that this business was going to evaporate over night with the introduction of YouTube. They went in search of a new business model, which ended up being eCards (American Greetings does $80 million / year with a crappy product, there has to be a good business there!). Gregg talks in the video about how they went in search of a business model and how they found one.

7. Why did you raise VC from Polaris & how have they been to work with?
After 6 years of no VC they realized that as a national brand they’d need to raise money if they wanted to grow. They took money from Polaris and have been delighted with their participation. I know this because Gregg has told me several times off camera. In the video he talks about how he chose them and why he likes them.

8. Working with a family member (Evan, the co-founder is his brother)?
Gregg founded the company with an equal partner — his brother Evan. It works well because they always had well defined roles. Evan is artist who is the creative genius who was working with the low-cost film medium in the late 90’s. Gregg is an ex Investment Banker and Wharton MBA. It was a marriage that worked well from day 1.

9. How do you keep the momentum after 11 years?
We had a discussion about how businesses change after the company really isn’t a startup anymore. He talked about what drives his recruiting decisions and whether he thinks he’d ever sell JibJab. The most important trait in hiring to Gregg has always been smart people who are hard working & a good cultural fit. He cares less about specific experience because great people always pick stuff up easily.

And there is so much more. Including how he got the name JibJab, why he’s build the company on the eCard model and where he got the idea (that one is brilliant — by trolling through 10-k public company filings looking for profitable business models), whether he’s Greek or Jewish, how he got the idea and what it was like meeting Obama & Bush having spoofed them. Do yourself a favor — find an hour to watch this great episode. I promise you Gregg doesn’t disappoint.

Appendix:
** I have enjoyed every episode that I’ve done and keep wanting to write up the notes from some of the previous shows but it’s time consuming. Any takers in a trade for helping do some write-ups against whatever you want? Advice, coaching, intros? It’s such a shame that I haven’t written up such great interviews as Seth Sternberg, Howard Morgan, Tom McInerney, Yves Sisteron, Mike Yavonditter and many more.