
Perfect Pricing Part Deux – More money from fewer sales - hawke
http://blog.asmartbear.com/higher-pricing.html
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ChuckMcM
This is the key, "Choosing a pricing strategy based on competition is a
natural approach, but also a flawed one. Price competition implies
scarcity—supply and demand market forces. There is no scarcity for ebooks
because digital files are replicated practically for free."

What Jason is alluding too, but no quite jumping into, is the economics of
information. In the economics off goods, there is a limit to the supply of the
goods, that limit is created by the economic forces of production. Basically
the more it costs to produce an item, the higher the price has to be to
recover those costs. But what doesn't change is the _value_ of the good. That
is why for some physical goods they are "impossible" to make economically
because the cost of producing them exceeds their value.

In an information market the cost to produce something is very very low, but
its value doesn't change. A book on design is valuable to everyone who needs
to solve a design problem. Even if there are a billion copies of the book out
there, the value is still in every one of them. So what Jason captures is that
pricing information requires one to consider pricing 'value' and the value of
information is directly related not to its cost of production, but to its cost
or procurement.

Thus pricing a book for $40 which has information which would cost $400 to
procure by hiring a consultant for a couple of hours represents a 'good
value'. Pricing it for $6 will capture additional market but it leaves money
on the table as well.

Its a different world and one that is not yet taught in business school as far
as I can tell.

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zaidf
As someone who bought Sascha's book, his pricing made it a no brainier. I
bought it in a snap.

So the difference is that Jarrod earned $2,000 more--or roughly 25%.

On the other hand, Sascha(who made less revenue) had 1,234 or almost 5 times
more paying customers than Jarrod.

You could argue(without seeming crazy) that it is better to have about 1,000
more paying customers for something like an ebook, even it means losing
$2,000. If Sascha's product was something like a SaaS product and each
customer had a support cost, the argument for fewer customers would be more
reasonable. But for something like an ebook, I'd chase volume even at the
expense of a couple grand in revenue.

It'd be interesting to track this in the longer term if the authors launch
more products. I'd put my money on Sascha to make more $ from future products
and come out ahead of Jarrod at the end.

~~~
Silhouette
_You could argue(without seeming crazy) that it is better to have about 1,000
more paying customers for something like an ebook, even it means losing
$2,000._

Actually, that does sound pretty crazy to me.

The world is full of entrepreneurs who think having lots of low-paying (or no-
paying) customers is worth something.

The thing is, we can easily tell how much a customer base is really worth
_right now_ , simply by looking at this month's bank statement. If it's in the
bank, it's real value. If it's not, it's just wishful thinking.

Maybe that wish will come true one day. Maybe I can monetize that large
customer base and dramatically outperform my higher-priced, lower-volumed
competitors. Maybe my product will reach critical mass and go viral. Maybe my
business will become the next Google. Maybe I can just skip the whole hard
work thing and buy a winning lottery ticket.

Or maybe not.

If the money is in the bank, there is no maybe.

~~~
smartbear
Here why I believe you're looking at it incorrectly:

Suppose there's two businesses, each making exactly $10,000/mo in revenue. One
charges $10/mo to 1000 active customers, the other charges $1000/mo to 10
active customers. Which business is "better?"

Clearly there will be two sides, neither of which are "crazy."

If the total market size for both is limited, then business B is better
because you're extracting more money from the limited potential number of
customers.

If the total market size is large, business A has proven it can get orders of
magnitudes more customers, which is MUCH more important going forward. If you
can get 1000, you can get 2000, etc., and indeed probably ever cheaper to
acquire those customers. Company B still has the very risky, difficult job of
solving customer acquisition.

If tech support per customer is high, obviously company B is better.

It is a general rule that over time you can find ways to increase prices (i.e.
just do it, have tiers, addons, etc) and decrease cost of acquiring customers.
That again makes Company A more interesting because they can start doing that
whereas B has just embarked.

Again, in the end one isn't automatically better, but your perspective that
"it's crazy" I believe is certainly not true.

Companies where people aren't paying AT ALL I agree are often in fact
valueless. But when they do take out their wallet, that's not nothing.

~~~
Silhouette
I would agree that without context one can't know which set-up has the most
_potential_. However, such potential is by definition just hypothetical funny
money until it's realised, if and when it ever is.

You contend that your business A has proven it can get orders of magnitude
more customers. Well, yes, it has: in fact, it's proven that it can get
exactly 1,000 active customers instead of 10. But if you're going to infer
from that statistic that business A can therefore get 2,000 active customers,
then why can't I assume company B can go from 10 to 20 by the same logic?

If anything, I might put more faith in the latter, simply because a lot of
people are going to drop $10 without thinking much. Very few people are going
to drop $1,000 without careful consideration even if it's someone else's money
they're spending, and if I were a betting man I'd rather back the product that
I know for sure stands up to scrutiny and still gets bought. But either way,
getting to relatively modest milestones like those you mentioned doesn't tell
me anything in itself about the total size of the target market, how much of
it I could realistically convert in the near future, or how well my product
will stand up to competition for those sales.

That being the case, it does sound a little crazy to me to argue that it's
actively better to have a higher sales volume even if it means a substantial
drop in profits, unless you've at least got strong evidence that the higher
numbers are expected to return an overall greater profit within a reasonable
period of time.

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sgdesign
Like many said, this is apples and oranges. First of all I had a very
different product. My 40 pages eBook took me about 30 hours of work, including
the promo site, whereas Jarrod's eBook is 130 pages long and has been in the
works for quite some time now.

I also had different goals. I wanted to build an audience for future products,
and redirect a little traffic and attention to my "real" project, Folyo
(<http://folyo.me>).

That project, by the way, has made me less money in 6 months of work than that
eBook did in 30 hours. I don't know if I should be happy or sad about that…

~~~
studiofellow
Sure, it's an imperfect comparison, but it's the closest we're ever going to
get through coincidence. Same launch day, same format, similar topic. The
length is different and the authors have different-sized audiences, but we
should be able to learn something from this, rather than write it off as
"apples and oranges."

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xarien
You're comparing apples to oranges. You've even stated this particular fact in
your post with the paper example. You state that one should not chose a
pricing strategy based on competition, but at the same time, aren't you
validating your own strategy based on the earnings of a competitor?

The comparison shouldn't be how much you made vs another book, what you should
be comparing is how much would you make if you sold your book for a different
price. What it comes down to is the basic economic theory of equilibrium.

~~~
ahoyhere
Jarrod's point in writing this essay was to question and counterpoint Sascha's
original claim about the "perfect price."

~~~
sgdesign
Come on, that was only a catchy title. Of course I know that there's no such
thing as a "perfect price"!

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rushabh
You can never make generalised comments on pricing. If higher prices are
better then why newspapers are shutting down and bloggers are rising? Why are
people using Linux? Pricing has nothing to do with Apple products. They sell
because of their design and quality.

I don't think the books are comparable. OP's book seems a lot more
comprehensive than Sascha's book (which I bought) and it would have taken him
a lot more effort. Themes are different (general design vs app design) too.

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scottdw2
Jason has a point:

You can maximize revenue by focusing on delivering higher value features to
more lucrative customers.

But, you need to be careful when following his advice. Blindly following the
principals of "revenue maximizing resource allocation" makes you susceptible
to disruption.

If you focus too much on high-end customers you can either:

1\. Make the product in-accessible to a large audience.

2\. End up overserving many of your customers.

That opens up the opportunity for new entrants to provide less-good products
at the lower end of the market, which you would be happy to ignore (you can
just write a $80 book next time, targeted at fewer folks), while the new
entrant follows you up market, until you have no business left.

It's not clear it applies here, as neither author has a structural advantage
over the other. However, just because you can earn more profits by charging a
higher fee to fewer customers, doesn't mean you should. It could kill your
business in the long run.

Take Windows PCs vs the iPad as a good example.

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tagawa
While I enjoy the discussion of differing strategies, I don't see why it has
to be an issue of who's right or wrong. If both authors have created good
content, their price point allows them to sleep soundly at night and they wake
up to positive cashflow, what's the big deal?

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reubenswartz
This is the real way to do it! Not only did this author make more money, they
have fewer customers, better customers, and can afford to take better care of
them.

~~~
true_religion
It costs nothing to sell a book to 10,000 customers as 1000 customers. There's
no supply chain for an ebook. No support costs. No, re-occuring billing, or
Q&A sessions for them.

More customers could arguably give you free word of mouth marketing, but fewer
"qualified" customers could give you better leads.

~~~
ahoyhere
As somebody who makes quite a bit of money off infoproducts (ebooks etc) --
and who has a lot of friends who do it as well -- I can assure you, there
_are_ support costs for ebooks. :) People lose download links, you have to
reissue. People want refunds. People have complaints. Not a lot, but it adds
up.

Lower-paying customers almost always are more demanding, less appreciative
customers. I've seen this in my biz (infoproducts, courses & SaaS), heard it
from friends in theirs (SaaSes, restaurants, training companies etc). It's a
truism probably because it is largely true.

As you brought up in your last sentence, there's also opportunity costs of
going with a lower price.

You've also taught those customers to only pay you $3-6, which means you may
have a harder time selling them on fancier products later.

Finally: Especially with infoproducts, when it's a no-brainer, people are
likely to buy on a trigger and then never _use_ what they bought. If your goal
is to help people, change their minds, build a community, this can be a kiss
of death.

~~~
wanderr
On the other hand, more expensive items often get worse reviews, because
customer expectations rise. For example, I was looking at espresso machines on
amazon a few months ago, and just about all of the $2k+ machines had worse
ratings than the <$250 machines. I find it highly unlikely that the order of
magnitude more expensive machines are actually worse, but they clearly set
expectations much higher and therefore lead to more disappointment.

~~~
runako
Corollary: if you charge more, deliver a product at least as good as your
cheaper competitors.

