Company meetings are a key step in how we choose stocks for The Henderson Smaller Companies Trust. Meetings bring several advantages. We can ask questions, for example clarifying a company’s strategy or results. We build an understanding of the personalities and experience of individuals managing a business. Sometimes we even get to see the company itself in action.
One recent addition to the portfolio captures the benefit of such meetings. Trustpilot hosts reviews for businesses worldwide. The company was first listed in 2021.
The promise and pitfalls of the freemium model
Trustpilot operates a “freemium” model, meaning that its basic reviewing platform is free for a certain number of reviews. Beyond this, companies can pay for various additional services, such as embedding the reviewing system into their own website and emails, or receiving analytics and insights based on their reviews.
It became clear to us that there was scope for the premium tier to grow significantly, with a large potential market. However, when we originally met management during the IPO we were concerned by a slightly unfocused strategy, which wasn’t maximising this potential. For example, the company was seeing significant “churn” among its customers. Its customers were cancelling contracts, rather than renewing them.
Change at the top
The company’s management and board have both been refreshed over the last two years. Individuals have been brought over from established online businesses, including a new Chief Executive Officer, Chief Revenue Officer, and a new Chief Technology Officer.
We met Trustpilot’s management again in early- 2024 and were encouraged to open a position based in part on the changes they had made.
The company has simplified its pricing structure, reducing the range of options available from eight to four. Simultaneously, the scope of the “free” tier has narrowed from 100 reviews per month to 50.
Alongside rationalising the pricing on offer, Trustpilot has also expanded its product features, launching six in 2024. These included customising review pages and responding to reviews using AI. While these features are not necessarily designed to encourage new sales or upselling, they could explain some of the improvement in retention rates.
Change in action
The results of these tweaks speak for themselves. Retention rates – meaning the number of customers who renew their contracts at the same, or higher, price – are above 100%. The number of 12-month contracts agreed rose 19% in the first half of its financial year. All of these numbers are positive, for a business that already had a compelling product offering.
As such, we have added Trustpilot to our portfolio. We are not naïve; the company has challenges including the risk of new competitors coming to the market or of its credibility being undermined by inaccurate reviews.
Nonetheless, we believe its refocused business model could prove a driver for its share price in the years to come.
Disclaimer
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