Stop guessing. Use A/B testing to determine ideal price for your product
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I've never heard that and none of the links provided in the comments so far justify your claim. It is a pretty extreme assertion and you provided no links justifying it either.
I can see this rapidly turning into an urban myth, whispered wild eyed at 3am over ramen noodles as founders try and figure out a price for their product.
Not quite - price discrimination is finding a way to take people with more money, and charge them more money. The challenge is, that prices people with less money out of the market - so price discrimination is about finding ways to justify cutting prices for some people while charging more to people who can afford more.
Examples: Student discounts, senior citizen discounts, kid's meals, and matinee prices at movie theaters are all price discrimation. A/B testing prices is... just A/B testing prices.
Though, the wise A/B price-tester does so by offering two different sales - one discounted product, and one more discounted product. This seems to minimize backlash - finding someone else got a better discount doesn't bother people as much as finding out they paid a higher price.
You're thinking that just because people don't do it, it must be illegal. The idea of "one price for identical items" is a pretty recent invention, dating back to the rise of department stores (Woolworth's, Macy's, Sears) at the turn of the 20th century. It's for economic reasons, not legal ones. They found that it was cheaper to forego the extra revenue than it was to hire all the salespeople needed to negotiate each individual purchase. Charge less and make it up in volume. It also has the advantage of fairness and simplicity, which customers tend to like.
I'm not claiming to know this of all jurisdictions, there may be specific circumstances in which this does not hold, but these are the exceptions.
You're thinking about laws around hiring. I can't charge you double to buy a VCR in my store because I don't like your face.
I think he's right though that there needs to be some linkage to "what you can and can't do, legally".
Not true. In fact, a lot of Maker businesses get hung up here. The pricing of physical goods depends on the market every bit as much as the pricing of software or web services. In fact, large companies rely on that all the time--case in point is P&Gs Swiffer Sweeper, that they charge much more than the manufacturing cost for the sweeper and for the refills.
Many small business owners I've run across actually feel guilty if they charge "too much" (say 100% markup) for their physical goods they are selling, even though their competitors sell at that price. The price elasticity of demand applies just as much for physical goods as it does for non-physical.
Compare that to software where no two offerings are direct substitutions (the degree varies, of course) and where one company can upset a market with new technology very easily without his competitors necessarily being able to duplicate (for skills reasons, legacy investments, ...). An incumbent can enter the market with fixed costs that are 75 or 50 or 25 percent of the established players. Such an incumbent can do two things: go deep on price to get market share, or get fat off 500% profit margins. I don't know of many such situations in physical goods businesses.
(of course the same could happen with physical goods, it's just much more common in technology)
eg:
1. Pick a pivot price
2. Make N buckets with prices at fixed intervals from the pivot
3. Find the bucket with the most profit, and use its price as the new pivot
4. Repeat
There are also complications around noise from large outliers. Though this matters less with a fixed price service.
Say you were selling tickets to hear Lang Lang play the piano. You could try selling those on the corner of 3rd and Main and get $20 for them because no one you talk to (unless you get lucky) has heard of him (and you could waste a lot of time convincing them that he's great). Or you could move your booth to the more fashionable part of town and sell them in 5 minutes for $250 each.
We're debating trying this and I'd like a bit more evidence that it really works and why it does.
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1. Amos Tversky, "Features of Similarity," Psychological Review, Vol. 84 (1977).
2. Amos Tversky and Daniel Kahneman, "The Framing of Decisions and the Psychology of Choice," Science (1981).
3. Joel Huber, John Payne, and Chris Puto, "Adding Asymetrically Dominated Alternatives: Violations of Regularity and the Similarity Hypothesis," Journal of Consumer Research (1982).
4. Itamar Simonson, "Choice Based on Reasons: The Case of Attraction and Compromise Effects," Journal of Consumer Research (1993).
5. Amos Tversky and Itamar Simonson, "Context-Dependent Preferences," Management Science (1993).
6. Dan Ariely and Tom Wallsten, "Seeking Subjective Dominance in Multidimensional Space: An Explanation of the Asymmetric Dominance Effect," Organizational Behavior and Human Decision Processes (1995).
7. Constantine Sedikides, Dan Ariely, and Nils Olsen, "Contextual and Procedural Determinants of Partner Selection: On Asymmetric Dominance and Prominence," Social Cognition (1999).
"For example, if you are manufacturing staplers, all you need to do is to calculate cost of production and distribution, slam 20% margin on it and there you have the price you can sell your shiny stapler machines for."
That's called Cost Based Pricing and is one of many options. That's a decision that was made. You can argue that's the wrong way to price. If you make something in the US and charge 20% on top of costs and have a competitor making Staplers in China, you're out of business.
Boom. Roasted.
My customers don't care about ssl or extra storage so they'll always choose the cheaper plan. But if the basic plan was +$10 what percentage would still buy it?
this doesn't address this case directly, but it seems to say it's only illegal if done to harm your competitors.
In a free market you are free to charge what you want. Consumers are free not to purchase your item. Rules do vary around the world, so check with your local authorities. I am looking at this from a North American perspective.
There's a difference between giving bulk discounts and selling the same product for different prices to different customers.
And that is illegal anyway, as well it should be.
Selling the same product at different price points is done all the time (bulk discounts, account discounts and so on).
The issue here is not whether it is legal to sell the same product at different prices, the issue is whether or not it is legal to offer the same product to the same class of buyers at different prices at the same time.
And that is legal, even if not always in the best interest of the business:
http://en.wikipedia.org/wiki/Price_discrimination
I've done it, briefly, to test different price points and I made sure to refund those we tested at a higher level after the experiment was over.
The article lists the very specific reasons a case may be brought, and the various defenses. I do not see how any of this is relevant to your argument that "charging different prices is illegal". I do however agree with your concept that you should try out different prices strategies.
I have been amazed in my own experience when I make a package of my products priced beyond any shade of reason (from my view, as seller) and someone goes ahead and buys it. I had a manufacturing company and the 'big' package was to buy $1200 worth of goods and it was sometimes a tough sale. We tried a new 'big' package that was priced a little over $10,000 and it was an easier sale (to bigger customers). Lesson learned - don't ever think you know what the limits are until you test them. You might think that nobody would ever pay $100 per month for your widget, when some division of a Fortune 500 company would happily pay you a $1000 per month. Try it, you may be surprised.
My non-lawyerly reading says that you only need to worry if you're shipping physical goods for resale. And even then you have room to be OK as long as the price differences aren't creating a monopoly, and aren't enough to economically injure the people who receive a higher price.
The only issue I would see with this is that having the sudden "We lowered the price!" message would influence conversion rates at the final step.
You would have to measure and compare the number of "add to baskets" and "proceed to check outs" and not the revenue / conversions.
Cheers
After your product is established, the only way to test price sensitivity is to launch pro version.
* light version
* experiment with different sales and promo codes
* offer different rates for paying ahead a certain amount
-Your app has little publicity and is generally found through keyword searching. This means that you have few repeat visitors to the app page
-Your daily sales data has little variation. You typically see this 2 weeks after release when it is no longer in the new apps list. Avoid holidays and other sources of variation for your test.
-Schedule pricing into the future on one week increments. Try not to have pricing go generally up or down, perhaps by using some randomization or shuffling of possible prices.
-Use the revenue generated during each of the weeks coupled with the pricing to identify your ideal price.
Using poor scientific measurements (I crossed holidays, and did a declining price from a high point) I came up with $2.99 as an ideal price for my app.
Keep in mind that your sales rank influences your revenue, and if you think your app can break the top 100 apps list, then price it at $.99, because once you get into that list any losses prior due to underpricing an app are nullified.
Too bad the app store doesn't primarily sort by revenue (aka value to the consumer) and doesn't provide a continuous scroll past the top 100 which would make such devaluations unnecessary.