The Effect of Price on Performance
“If you haven’t overcharged at least once, you aren’t charging enough.”
On the surface, overcharging and potentially alienating customers may not seem like the soundest of marketing advice. But a series of tests conducted by MarketingExperiments.com, an online strategy consultancy, showed that there are no hard-and-fast rules when it came to pricing goods and services. By not testing, and therefore risking alienating some customers, marketers are potentially leaving money on the table.
Why take the risk? Because even a small difference in optimal pricing can have a huge impact on revenue–especially if the marketer is selling a high-volume product, or if it is subscription-based, meaning that the slight variation in price will carry forward in a years-long relationship.
In one experiment, the consultancy was charged with determining the best price for a psychiatrist’s book. MarketingExperiments drove traffic to the psychiatrist’s Web site using five carefully chosen search keywords on Google AdWords. MarketingExperiments feared that using too many keywords would inject another variable into its test, namely whether certain words attracted individuals willing–or not–to pay premium prices.
At $7.95 per book, the psychiatrist’s site generated 390 orders, for revenue of $3,100.50. At $14, 480 people ordered it, paying a total of $6,720. And at $24.95, 300 people purchased it, yielding $7,485.
According to MarketingExperiments, the $7.95 price indicated to potential buyers that the book was of lesser quality. At $24.95, the site generated the highest revenue on the fewest number of books sold–in short, that price produced the best margins, as well as the greatest total revenue.
But at $14, the site sold the greatest number of units. Why is this important? Because it allowed the psychiatrist to establish a relationshih with the highest number of customers, essentially priming them for additional offers. As MarketingExperiments noted, margins should be given heavy weight when considering pricing physical products. For subscription-based items, which have longer-term revenue potential, the ability to sell additional items to an audience may shift a goal from maximizing profits to maximizing customers.
Sometimes maximizing customers through minimizing price is the best strategy. This is especially true where there is no physical product to incur manufacturing and shipping charges that chew up margin levels.
Take a study MarketingExperiments conducted for a pay-for-access Web site. During a three-day test, a $10 price for a month’s access generated $156 orders, for total revenue of $1,560. At $12.50, the number of orders dropped to 94, or $1,175. And at $14.95, the site sold only 74 orders, for a total of $1,106.30.
The cost of establishing the site was fixed: No matter how many customers accessed it, the “manufacturing” charge would not increase. And at nine cents per click on chosen key words, the impact of advertising costs on the bottom line was minimal.
At $10 per subscription, the company generated $751.98 in profit, for an ROI of 93.06%. At $12.50 per subscription, profits fell to $366.98, for a return of 45.42%. And the ROI bottomed out at the $14.95 level: Profits amounted to only $298.28, a comparatively dismal 36.91%.
Furthermore, at that lower price more of the subscribers will likely stay on. Six months out, that group of subscribers is projected as bringing in $210,600, while at the $12.50 level, they will spend a total of $158,625. And again, at the highest rate, the six-month revenue projections are for $149,350.50 – although it is interesting to note that for these projections, the ROI difference between the middle and most-expensive groups is smaller that it was for the one-month test.
As a final note, MarketingExperiments cautions that testing once is not enough. Markets change, and today’s best price may not be the ideal price six months from now.
