These prices have a Goldilocks structure where there is a natural market price bounded by a high and low price point.
For instance, for small business software as a service, cheap end is $10/mo, high end is $50/mo, and just right is $20/mo.
In another case, price per user tends to be $5/mo./user at the low end, $10/mo./user is the fat middle, and $20/mo./user is the high end.
You can see how the OP fit this model as he went from $5/mo. to $10/mo. to $20/mo. Without knowing his product very well, I would surmise that each price increase signaled a higher level of quality to the market while still remaining within the reasonable and expected bounds.
This seems to fit accross the board - meaning if you selected a price group to test of $10 / $20 / $50 as your first test, run a secondary test with your winner and even derivatives.
EG if you sell the most @ $20, try $19.95 / 19.97 / etc - you can squeeze suprisingly large gains out from that fine tooth testing.
We covered some of this a while back in our blog post on price elasticity testing w/some of our results too -
Always try upping your prices, that should be the first rule of business :)
This is an essentially 0 risk way of doing price discovery and you will usually be surprised at how high you can go before people finally quit.
I once had a customer that was really in the 'nothing but headaches' category. They came with a new job and I really should have said 'no', but instead I figured I'd just quote a very high price and they'd go away.
They accepted :(
Unless you wouldn't have been happy with any amount of money, in which case I assume your client was the third Reich!
Not quite, but close :)
I think it's best to avoid beginning working with a client if you don't think you'll have an enjoyable, productive relationship. If you start having problems with an existing client, the best thing is to communicate openly and clearly about the problems and try to solve them together. It's important not to write them off as a "problem customer" but to give them a chance to know what isn't working and to solve it. If you're not able to work things out together, then it's time to part ways.
I nosed around their site, and found I can regrade my account with a "just a price cut" button.
I'm mystified by why they would pay someone to seek out and cut their profit from previously happy customers. If they'd told me they had taken over the company and needed to increase the price by that amount, I would have agreed. Is this a sign that the new owners aren't very good?
Upvoted you, but the answer is no, this might be a very smart move by them depending on their strategy.
If they want to lock down market share, this is a great play to build loyalty, especially if there's new competitors directly in the space (other broadband) or substitution products (3G, whatever). They might have run some numbers and figured X% of their customers would get poached if they remained at high prices, and it was better to preemptively lower prices and get a lot of goodwill in the process. Market share + loyalty. Max short term cash isn't always the best goal.
Edit: Especially in a business that's high capital intensive with low marginal costs. Furthermore, doing this might dissuade other companies from coming into the space to compete. Strategy can get complex, especially when you've got millions/billions already invested infrastructure.
If they offer one (or a few) options with consistent service and pricing, they will do them better with higher consistency and quality.
Makes me think of In 'N Out Burger...getting hungry. :)
Large companies do silly things.
I think the point of this article can only really be taken as applying to the consumer web; while its point might ring true for enterprise customers, they're a much more murky environment in general.
What you've done is some basic "elasticity testing", which, in the "real world" can often be difficult or impractical, but lends itself particularly well to online transactions of relatively small dollar amounts. More people selling small services online should be doing this - traditional businesses would love the luxury of doing it so easily.
Part of the reason is that if people notice something's cheap, they'll think the quality is cheap as well. And vice versa.
It's amazing how much you can be 'off' about what your product is worth to your visitors if you do not do drastic experiments like this to figure out the range of prices that are acceptable.
I think we all subconsciously price based on 'cost+', we price based on what it costs us to provide a service, tack on a profit margin and then we round that to the nearest reasonable sounding figure.
But you should be pricing based on perceived value. Not on your costs...
And the perceived value may be a lot higher than is apparent to you as the creator of the product.
It still happens to me occasionally (but rarely), and it never ceases to amaze me that there are still people living under rocks thick enough to block out information like that.
Same with wikipedia, you'd think that the news is out by now. But there are still people that have never heard of it.
I suppose it's not a bad thing for you in the short term, but I'd caution against getting comfortable on the profit cushion, and reinvest in revenue sources that can't be taken away by the same opportunistic competitor.
The interesting bit is that I was just as skeptical as you are (and probably even more so) and in the end decided that trying it was the easiest way to see if it was true or not.
The second time I was even more skeptical but then I figured 'in for a penny, in for a pound', just to be able to tell Richard that he was wrong the second time. But he wasn't.
It doesn't hurt to try though, and if it does work for you then it's free money, which is nothing to sneeze at.
Keep in mind that if your product costs you $2 to put out there per paying member and you manage to increase your sales price to $19.95 you've just gone from a 50% gross profit margin to 90%.
Also, for consumers, $19.99 is pretty much a fixed limit. Above that, you loose people, but below, you don't necessarily gain more signups.
That way you can market to two demographics and cover the market. Extra bonus is that you can use essentially the same underlying tech.
My company produces a PDF reader for iOS+. There are, give or take, 20-30 competing products. One of them is iBooks, which is heavily marketed by Apple, a high quality product, and free. Most of the others are cheeper than us, but we're out-grossing and out-unit-selling many of them. There are at least a dozen products with non-zero day to day unit sales. One day before we went live in the App store I discovered that there were not one but two products with basically the same name as ours++.
We can't credit marketing for this either. To be frank, our marketing has been terrible. We've tried to build a better widget, but mostly I think it's that we have a slightly different widget.
From the perspective of a customer: I pay for Lighthouse and Github every month. Github offers issue tracking, and both Github and Lighthouse try to keep things pretty minimal, but I prefer Lighthouse. It just feels more like the bug tracker I would build if I decided to go down that road, and that's worth a few bucks to me every month.
+ Plug: http://ballisticpigeon.com/folio
++ We did our due diligence when we started writing the app... about a month in... before we started writing our user manual, but at about two weeks from launch we were in crunch mode and stopped checking anything. They were both released in this window.
A: The existing, lower rate.
B: Advertise a higher rate. After signup is completed and the customer is fully expecting to pay a higher rate, inform them that the newer rates haven't "taken effect yet" and they will instead be billed at the previous, lower rate. This preserves both experimental validity and ethical pricing.
1 months @ $40 vs 3 months at $20 ...
Concurrently testing 2 pricing schemes for the exact same service feels sketchy or unfair (to the customer) to me–especially if its a 2:1 ratio ($5 vs. $4.99 I can understand).
I'm sure it doesn't fall under "price discrimination" but it still doesn't feel right ... should I not feel that way?
If you're really against it, don't test two at the same time. Just double the price for new customers and see how that affects signups.
My gut feeling is that A/B pricing would be illegal because it's unfair: a part of the buyers have a discount the others don't even know about.
IANAL though :)
I believe as long as it's a different physical store, it's probably possible to set a different price.
My impression (that would need more research) is that having two different prices for the same product at the same time inside the same physical store or on a website would be problematic; otherwise it's probably ok.
I think I really need to make more research - A/B pricing would definitely be interesting.
I'm not sure which is more common (fixed price across the country like here in Uruguay or Argentina, or store-by-store variation like the US/Canada)
Here's how it works: The "general" category is assigned a base price of $1. All other categories are assigned "price multipliers". For example, the price multiplier for cars is 15. So, to list a car would be $15.
I have a table of ad codes which modify the base price by a factor of 1 to 5. When the site recognizes an ad code passed as a url parameter, it uses this multiplier, plus the category multiplier to determine the price shown to the user. So, for example, using an ad code with a price multiplier of 5 would make "general" listings $5 and a "cars" listing $75.
In addition, each ad code can have an associated promotion. Each promotion has a flat discount or is percentage based. So, an ad with a 5x multiplier and an associated promotion of 50% off would be $37.50.
When a user signs up, the ad code is associated with their account and they are always show the same prices. Likewise, returning users that haven't signed up are shown the same price as long as they haven't deleted their cookies. I get an email when a user is shown a price change just to be aware of how often this is actually happening and if it's becoming an issue.
If the user clicks on ad 1 and then ad 2, which have both different price multipliers and promotion percentages, the multiplier stays the same but the percentage off changes if the new percentage is higher.
I haven't executed the full test yet, but the idea is to find the optimum price at which users will buy a listing. If you want to see it in action, try this:
1) Go to http://foreverlist.com/why
2) Open a new tab and go to http://foreverlist.com/why?ad_code=FBSV45k (multiplier 2x and 25% promotion)
3) Clear your ForeverList cookies. In firefox this would be edit->preferences->privacy->show cookies, put foreverlist in the search field and click remove for each one.
4) Open a new tab and go to http://foreverlist.com/why?ad_code=FBLuzq6 (multiplier 5x and 50% promotion)
5) Compare the example price at the bottom of the comparison chart in the "foreverlist" column in tabs 1, 2 and 3.
I'm writing up a detailed blog post about the experiment, so if you're interested in the results I'll probably post it here or you can just check back on the site directly (There will be a "blog" link). I'm also working on improving the site design, so the full-blown test may be delayed for that.
After I've determined the optimum price and implement that permanently on the site, I plan to issue a refund to anyone who paid a higher price and thank them for their patronage, etc...
I'm hoping there is a market for ForeverList, jacquesm/tptacek are right about pricing and the winning ad isn't the one with a price multiplier of 0. :)
And I'm also really curious how many people will try the price doubling (once or more time) and will write about it.
I have one answer at http://elem.com/~btilly/effective-ab-testing/#slide94 but I'm interested in seeing how others tackle this problem.
sure you can undercut their $3/mo...or you can bump your price up to $15/mo and use the difference on advertising.
Chances are that 99% of your customers will never even see your competitor...so you won't hurt your business by charging more...and you can use the extra revenue to promote your product in places where your competitor just can't afford to promote in.
That seems to be the hardest thing to convince people of. 'But my competition'... Yes, you are aware of your competition but your users are most likely not. They found you instead.
So, is there a way out?
One thing we found early on selling to universities was that if we priced ourselves to low, some schools wouldn't give us the time of day, other schools would start comparing us to "competitors" who weren't our competitors at all and did nothing like we did, but who shared a similarly low price.
I still remember when we sold our first (small 3000 student) school for $6000/yr. When they gave us the check they said, "Eh, that's a drop in the bucket." Talk about leaving money on the table.
If enough people do drop the original one and make the premium package the 'normal' one, offer a discount to your old users.
People aren't going to spend more for the hell of it. I don't think this is a useful technique for determining the minimum viable cost for a service.
Even the same model car but a more expensive trim will sell for a higher price than the same model without the trim.
Features can be used to substantially increase the price of a product while only marginally increasing the cost.
The concern I could see with this would be that you raise your price for a few days - you get a few takers but not as many as you hoped, so you lower the price back down to the original levels. I'd be a little concerned that those who subscribed at the higher levels would not be happy paying a higher recurring monthly fee when they could now subscribe to the product at a cheaper rate.
Would you / did you just manage those users back down to the original payment levels for the future months payments ? Or leave them at the higher payment levels and manage on an adhoc basis should they raise issue with pricing levels.
To follow up on this - with A/B price testing how does this work when you are lowering and raising your prices all the time - what's the general approach - to admit 'mistakes' or refund the difference or just manage on an adhoc per issue raised basis ?
A recurring service that is purchased, where you priced things too high and saw prices drop off, and then quickly moved it back - telling the customers who paid too much, and who would likely get pissed and leave when they find out you were unlucky represent an opportunity to market yourself - saying "Hey, we over did it a bit - we're crediting what you already paid forward at our new reduced rate, and keep charging you at that rate going forward, we appreciate your business!". If anything, that's going to make your customer who was willing to pay double what you are now charging him happy, and spread the word. Who doesn't like to find out they just got a 50% refund?
You don't lower and raise your prices all the time, you do it once to determine the sweet spot and then you stick with that for a much longer time.
For me it was exactly as described: 2, evaluate, 2, evaluate, *2 evaluate -> go back one step.
At each step we had at most a few hundred signups processed before we made the decision.
The fact that it took as long as it did is only because I was skeptical, I should have realized much earlier that it can't cost too much to try, after all your signup rate would have to halve before you start to lose money.
It seemed to be the most fair way to deal with it.
This is easier to see with one of those apps that keep track of apps that lowered their price, some of them keep appearing on that list.
Fair warning, not always safe for work, though we do our best to get people to label their cams properly.
ww.com is a huge grab bag of both the good, the bad and unfortunately the ugly. People got married there, it has caused divorces, I've seen babies be born and I've seen people die... It's been the project of a lifetime.
Not that I'm aware of!
Best not use them here; or HN might get banned too... oops!
I think that the app store makes it so easy to compare stuff side by side that I would expect the difference to be smaller, but that's just a gut feeling.