A/B testing prices would be ideal when trying to find out how much people are willing to pay for your product. Unfortunately it's a rather risky practice, so doing it over time as suggested by Jacques may be a better approach.
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.
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.
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%.
That way you can market to two demographics and cover the market. Extra bonus is that you can use essentially the same underlying tech.
Made gravy?
An anecdote:
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)