
Pricing Experiments - DanielRibeiro
http://conversionxl.com/pricing-experiments-you-might-not-know-but-can-learn-from
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CamperBob2
I'm dealing with a rather strange pricing dilemma now, actually. My startup
sells a somewhat-arcane electronic test instrument which is generally used by
larger corporations, government agencies and defense contractors, and
universities/national laboratories. It's advertised for sale at $4995.00 in
1-4 unit quantities, which is an insane bargain compared to what these users
are accustomed to paying for similar equipment.

I sold one to a particular Fortune 500 company a few months ago. Recently
someone else from the same company -- a fairly highly-placed manager, going by
his LinkedIn profile -- emailed to ask for a quote on a second unit. Except he
insists that his budget is in the $4800 range, and he needs the quote to come
in under $4995 in order to make the purchase.

I can't begin to guess how to interpret this, or how to answer it. Lowball
offers are nothing new, and generally easy to turn down since demand for this
piece of gear is in line with projections. And there's plenty of room for
negotiation on purchases of >4 units. But a lowball offer for one unit, from a
company with a $15B market cap, asking for a discount that's negligible to the
point of wasting both parties' time? WTF?

I'd like to maintain a good relationship with this company and do further
business with them, but I don't understand the signals they're sending with
regard to price tolerance. _Obviously_ if I were asking $5995.00 instead of
$4995.00, they would have tried to drill down to $5895.00. I have to believe
that the same would be true if the advertised price were $3995.00. Could I
have avoided this bizarre negotiation by picking a price of $X495.00 instead
of $X995.00?

~~~
patio11
The game theory for large corporations asking for discounts: If we don't ask
for a discount, we don't get a discount. If we ask for a discount, sometimes
we get a discount. Thus, we write in our Big Book of Purchasing Rules to
always ask for a discount. (Or you just ran into one guy who likes the psychic
charge out of winning a concession.)

P.S. You're only an insane bargain for one sale. After that, your price _is_
the reference price.

~~~
djt
this P.S. is brilliant. If it's a bargain then you may think about increasing
your prices?

~~~
victor9000
and it applies to every market, particularly labor.

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josephlord
Really liked this article. It pulls together a number of things I had heard
before with some new ones. We are all quite a long way from the economist's
idealised rational actor.

I released my first real experiment <http://itunes.com/apps/fastlists> (yes
it's another lists app but it is currently free, with no ads and has a couple
of useful features making it especially useful for reusable lists for
shopping, packing etc. The design is functional rather than beautiful).

I'm currently adding some in-app purchase options to test the reactions of the
users.

My current idea is to offer the following options: (price tiers equate to $1
or local equivalents I think)

1) No-ads (tier 1 price)

2) Privacy - No anonymous usage collection.(tier 1 price)

3) Raise item limit (by 100 to 200 items) (tier 1 price)

4) Unlimited items (tier 3 price)

5) Everything including future in-app features (tier 5)

For me option 5 is important because I hate feeling I will need to keep paying
bit by bit for something. It will include everything that doesn't need server
side support and expense. I actually hope most customers choose this, the
other items are there largely to justify the pricing of this item.

Ads and anonymous usage monitoring will come in releases after the purchases
have become available as I want to give people the option to opt out first and
for ads I will probably make the first month of use add free to try and get
the user stuck in. I may also add some alternate skins as in-app purchases too
later although that is lower priority than using the iOS 6 social framework as
a way to try to get users promoting the app for me by sharing lists.

There is currently no item limit so I will allow existing users who installed
before the limits were introduced to have unlimited items on the devices they
have already installed on.

At the moment this is just a small scale test because I haven't done any
promotion for the app yet so the current numbers of users is small although
the reviews are currently very good (4.5* average in US and UK).

Any thoughts on the pricing model? Or the app?

~~~
LiveTheDream
My first thought is that there are too many options, and the privacy option
should really be a user-controllable setting to begin with.

~~~
josephlord
Even with privacy off I won't get or keep any personal information just basic
usage stats that will help me understand how users are using the application.
This is something that I value the ability to do, it should be beneficial to
users as I can improve the product so I would prefer not to give it up for
free although I do want to offer people the option of not having any data sent
back.

Things that I plan to monitor when I have time to set it up include things
like frequency of use, number of lists, number of items, maximum depths of
lists. Whether it is an iPad or iPhone it is being used on, what the default
language is, whether they are using the email features and what items they
have purchased.

I will have a persistent ID for each Install so that I can track usage
overtime and try to identify if people stop using the app but it won't tie
directly to any person or even device that could be identied by any means
outside the app.

~~~
joshschreuder
I think it gives the wrong impression though. People don't expect to have to
pay for their privacy (the level is regardless - the default expectation is
that data is not being kept), so it will get people's noses out of joint.

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jordn
And if you want your product/service to be perceived as very cheap,
particularly if it's a fairly commoditised product: make your website look as
cheap and awful as possible, à la <http://ryanair.com>

~~~
gamzer
The typeface used in their logo...

I would love to read more about this method. Has it been thoroughly studied?

~~~
joshschreuder
That's actually a big improvement on what their website used to look like:
[http://wiki.darkpatterns.org/Trick_Questions#Example:_Ryan_A...](http://wiki.darkpatterns.org/Trick_Questions#Example:_Ryan_Air_trick_insurance_opt-
out_trick_question._.28August_2010.29)

------
dustincoates
Really good article, with a lot of actionable tips.

With that said... I can't be the only one who is tiring a bit of the crediting
of Steve Jobs with nearly-mythological feats. For example:

>People used to download music for free, then Steve Jobs convinced them to
pay. How? By charging 99 cents.

Even ignoring the "people don't download music for free anymore" implication,
it seems pretty obvious that charging $.99 for a download isn't what led to
the success of iTunes.

~~~
dhimes
Agreed. You could buy music for as little as $0.50 a song through RealPlayer.

~~~
joshschreuder
But what if it were $0.49?

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klearvue
MIT's OpenCourseware makes available a set of very good course lectures on
pricing here: [http://ocw.mit.edu/courses/sloan-school-of-
management/15-818...](http://ocw.mit.edu/courses/sloan-school-of-
management/15-818-pricing-spring-2010/) Although unlike the article, it
focuses on economics rather than psychology.

~~~
unobliged
The psych is covered in the 3rd set of slides (Pricing Under Consumer
Uncertainty). As someone who took the course, it was excellent and the
outlines actually do cover the majority of what is offered in the class. I
would highly recommend reading through them, though they are a bit dense and
lack the color and charm of her slides (not on OCW).

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ljd
A/B testing your prices to find your most profitable price point over time can
help you remove guessing from your pricing strategy.

The author mentions that A/B testing among concurrent visitors can get you bad
PR but forgets to mention that A/B testing prices over time is the only way to
confirm your price is the best. Anything less is just speculation.

~~~
propercoil
dead right. whats works for someone won't necessary work for anyone else - you
MUST A/B test. i increased my ROI week by week with a/b testing and in my mind
now if you not doing it then it's a crapshoot.

But there are things that are (asymptotically) absolute truths in marketing
and i loved the article. i bookmarked the site which i don't do very often

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Bill_Dimm
" _Under the simple pay-what-you-wish variation, 8.39% of people purchased a
photo (almost 17 times more than before), but customers paid only $.92 on
average.

The final option — pay what you wish, with half the purchase price going to
charity — generated big results: purchase rates of 4.49% and an average
purchase price of $5.33_"

There is a significant peculiarity here that the author ignores. Yes, pay-
what-you-wish generated more money when the purchaser was told that half of
the money would go to charity, but the percentage of people purchasing was cut
NEARLY IN HALF when they were told that half of the money would go to charity.
Doesn't that seem odd? If I tell you you can purchase a photo for whatever
price you want, and you are willing to pay $X, and I then tell you that half
of the money will go to charity, would you then decide that you are no longer
willing to purchase at any price at all?

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lhh
This brought to mind something from Cialdini's book, Influence. In one of the
case studies he argues that in the absence of a reliable way to assess the
quality of something, consumers tend to use price as a proxy for quality. In
his example, a jewelry store has been unable to sell one of their product
lines, so the store manager leaves a note to an employee to mark down the
jewelry by 1/2. The employee misreads the note and instead marks up the
jewelry x2, which leads to the jewelry quickly being sold.

------
zissou
Lots of good examples here. Ariely's first 2 TED talks are great, but be
careful with behavioral economics. For most start-ups, thinking about pricing
in terms of hardcore microeconomic theory is probably a better route. The fact
that so many digital goods truly have a marginal cost of 0 for the producer
brings life back to the "Let's assume we have a constant marginal cost" phrase
so many bright eyed Principles of Microeconomics students (and MBA students)
have heard coming out of their economics professors' mouths. My point is that
if something is a fact and not an assumption, then that's one less assumption
you have to make.

In most markets, I'd say that setting the price for a product almost always
boils down to 2 general concepts: market power and price elasticity.

Market power comes from producer theory and, generally speaking, refers to how
much control you have over the price of your product. One way to think about
market power is to start by thinking about the monopoly case. A monopolist, by
definition, is the only firm in the market. A monopolist maximizes their
profit at the quantity, call it Qx, where [MR = MC] OR [dTR/dQ = 0]. However,
unlike a firm in a competitive market, a monopolist sells their good at the
price associated with Qx in their own demand function (which for a monopolist
is the market demand). Geometrically speaking, in a less-than-competitive
market the "spread" that exists in the space below the demand function but
above the marginal revenue function, and over quantities up to Qx, is semi-
technically where market power can exist.

There are a couple different types of price elasticity. The most commonly
discussed one usually refers to a product's own-price elasticity of demand
(EoD), which is a measure of how much your quantity sold will change if you
change your price by a little bit. Or in other words, it refers to how
sensitive the consumers if your market are to changes in the price. For start-
ups who have competitors, knowing your cross-price EoD would also be useful.
If changes in your customers income in some way affects your business, then
you could even think about the income EoD. Their are also types of
elasticities which are meant to measure how sensitive consumers are to prices
as time changes. Microeconomists and industrial organization economists have
done a lot in this space. On another note, Bing Travel and their price
predictor is a good example of some really sweet data on consumers temporal
price elasticity of demand that I would love to get my hands on.

At the end of the day, a model is only so good. But models aren't meant to be
absolute truths, their meant to guide your analysis. If you're product is
something that no market currently exists for, then read up on the topic of
market design. Al Roth at Harvard has some really great material and is
perhaps the most influential market design economist to date. In my opinion,
the most interesting ideas, concepts and theories from economics all stem from
microeconomics. Current macroeconomic theory is a scary, scary place somewhere
in a deep, dark hole. For a funny video on the matter:
[http://gregmankiw.blogspot.com/2012/01/home-for-
holidays.htm...](http://gregmankiw.blogspot.com/2012/01/home-for-
holidays.html)

