Perfect Pricing Part Deux – More money from fewer sales
blog.asmartbear.com
blog.asmartbear.com
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.
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.
Assuming customers share at the same rate, the potential growth is much bigger for a larger audience, absolutely. But I'm not sure our customers will share at the same rate—I think mine will share more because they're fans. But this is speculation, and biased.
It's intuitive, and mostly wrong.
Which is why I recommended the book Pricing with Confidence to Sascha when he made that same argument in the comment thread of the OP. And why I blogged about this book several times:
http://unicornfree.com/2011/will-low-prices-sell-more/ http://unicornfree.com/2011/when-customers-bitch-about-your-... http://unicornfree.com/2011/biz-book-friday-cost-plus-pricin...
It's a fantastic book. Everybody who cares about their business should read it.
* sell the first book in a series at a low or free price
* sell additional books in the series at a higher price
I think the assumption is that the initial sale "hooks" the user into the story, as well as giving the reader a taste of the writing style, and the thinking is this leads to additional sales in the follow-on books that would likely have never 'converted' to that first sale.
Would this be a case where "penetration pricing" of the first part of a many-part story would work? One of the special circumstances?
Thoughts?
That's why you won't terribly mind paying $100 for a compiler textbook, but definitely wouldn't pay $100 for the novel from your favorite author. (Unless possibly it was signed, or charity.)
Sascha's ebook isn't a story, it's a standalone tutorial. There's no burning need to find out What Happens Next.
Meanwhile, when you sell software or educational ebooks cheaply, what you do is attract cheap customers. And pretty much the universal experience of folks selling things to cheap customers is that the cheap customers are more annoying, more demanding, less likely to actually make use of what you sell them (and ergo less likely to buy again), plus price sensitive.
Sorry, but I know far too many people who enter new niches with an inexpensive ebook and then once they have built a solid list of customers interested in the niche, they go on to sell products worth thousands of dollars per copy.
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.
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.
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.
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…
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.
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.
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.
More customers could arguably give you free word of mouth marketing, but fewer "qualified" customers could give you better leads.
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.
I think it matters a lot WHAT you're selling.
At $500+ a head for a day, our JavaScript workshop is more expensive than just about any other way of learning JavaScript. But we get almost exclusively rave reviews, because that price keeps out anyone who's not really committed.
And I've found that, as I charged more for my product class ($500 -> $1250 -> $1550 -> now $2450+), people have become MORE enthusiastic, MORE involved, MORE likely to finish, MORE helpful to their fellow alumni, because the price is a filter and it's a kick in the ass. (When you only pay $500, you don't feel the pain so much when you let it fall by the way side. But nearly $3k is a LOT to sacrifice to laziness.)
Obviously, this wouldn't work if I wasn't great at teaching. And I am great at teaching. But I've watched the enthusiasm level increase with the prices, rather than the other way around, even though I, the teacher, haven't changed, and neither has the material all that much.