When
you're setting the price for physical goods, particularly commodity goods, you may not have a great deal of flexibility. However,
if you are selling something less tangible—like a service, a subscription, a seminar or downloadable report or book—the
range of prices you can charge is very broad, and often surprising.
One
management consultant might charge $200 an hour, while another might charge $100 an hour. Is the first one twice as good as
the second? Not necessarily. But he or she is probably a lot better at setting prices.
Is a
68-page e-book worth five times as much a 200-page book by a more established author on the same subject? Probably not. But
we have all seen e-books flying off their virtual shelves at prices that seem astonishing compared with those of printed books.
And
how about online subscription services? Is the value you offer behind your subscription wall worth $9.95 a month? $34.95 a
month? Or maybe even over $100 a month?
The
only way to determine your best price is to test
When
you test by offering a variety of different price points, you will get objective data to work with. You'll be able to see
what people actually do, as opposed to what you think they will do. In other words, testing takes a lot of subjectivity out
of the equation.
There
is one fundamental guideline to testing prices: Keep charging more and more until you reach the point at which people walk
away.
That
highest price may not be the best price for you to choose. But you should at least know what the highest acceptable price
for your service may be. Here is an example of a price test conducted by MarketingExperiments.com for a leading psychiatrist
and author to determine how to maximize the online sales of his newly published book. These were the three price points tested:
1.
$7.95
2.
$14.00
3.
$24.95
A large
volume of traffic was driven to three sales pages using just five search terms on Google AdWords. Using an A/B/C split test,
the traffic was evenly distributed to these three pages—each of them identical except for the price.
Here
are the results of this three-day micro-test:
|
Price |
$7.95 |
$14.00 |
$24.95 |
|
Orders |
390 |
480 |
300 |
|
Revenue |
$3,100.50 |
$6,720.00 |
$7,485.00 |
The
highest price was the "torture" price, to see how high the price could be pushed. As it turned out, it was the highest price
that generated the most revenue, by a significant margin.
The
first lesson learned here is that if the highest price had not been tested, nobody would know that so many people would still
buy the book at $24.95.
However,
after you have tested, it's time for some analysis...
In the
case of this book, it would have been tempting to declare the highest price the "winner" and look forward to high monthly
revenues from that time on.
For
some services or products, that could have been the right decision. In this case, it was the number of orders that caught
everyone's attention.
While
the $14 price point didn't generate the highest revenue, it did attract the highest number of orders, by a very large margin.
This
raises an important question: "Which is more important, to achieve the highest, immediate revenue? Or to secure the largest
number of new customers?"
If a
key priority is to get new customers, then you might want to choose the $14 price point. This is particularly relevant if
your service generates recurring revenues, or if you have a track record of being able to successfully upsell or cross-sell
to your customer base.
Start
with testing, then follow with analysis
It's
impossible to be sure about the best price point for a product or service without first testing a variety of options. And,
as mentioned, it makes sense to find out how high you can push that price.
Then,
as with all testing, it's important to study the results in detail before jumping to conclusions too quickly.
Consider
your business model carefully, and choose the price point that best supports it. And when in doubt contact Phoenix ONE, we can help!
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