Perfect Pricing Part Deux – More money from fewer sales

http://blog.asmartbear.com/higher-pricing.html

by hawke • 14 years ago

45 25 14 years ago

blog.asmartbear.com

This is the real way to do it! Not only did this author make more money, they have fewer customers, better customers, and can afford to take better care of them.

true_religion• 14 years ago

It costs nothing to sell a book to 10,000 customers as 1000 customers. There's no supply chain for an ebook. No support costs. No, re-occuring billing, or Q&A sessions for them.

More customers could arguably give you free word of mouth marketing, but fewer "qualified" customers could give you better leads.

ahoyhere5• 14 years ago

As somebody who makes quite a bit of money off infoproducts (ebooks etc) -- and who has a lot of friends who do it as well -- I can assure you, there are support costs for ebooks. :) People lose download links, you have to reissue. People want refunds. People have complaints. Not a lot, but it adds up.

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.

zaidf2• 14 years ago

As someone who bought Sascha's book, his pricing made it a no brainier. I bought it in a snap.

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.

tagawa2• 14 years ago

He's also using a timescale of just 48 hours for the comparison. Over the long term, I would have thought a greater number of customers would have a greater impact on word-of-mouth recommendations and reviews, leading to more sales.

studiofellow2• 14 years ago

You're assuming a higher price causes lower sales, but I don't think the data supports that. If you were hypothetically faced with such a tradeoff, I understand sacrificing some profits to gain more customers. But if you could have both profits and more customers, why not? I think it's possible.

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.

ahoyhere5• 14 years ago

This theory is called "penetration pricing," and most research shows that it works very rarely, and only in specific circumstance.

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.

stock_toaster• 14 years ago

I have seen several fiction writers starting to do something like this on amazon (for books in a series):

* 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?

Silhouette2• 14 years ago

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.

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.

smartbear• 14 years ago

Here why I believe you're looking at it incorrectly:

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.

tagawa2• 14 years ago

While I enjoy the discussion of differing strategies, I don't see why it has to be an issue of who's right or wrong. If both authors have created good content, their price point allows them to sleep soundly at night and they wake up to positive cashflow, what's the big deal?

ChuckMcM• 14 years ago

This is the key, "Choosing a pricing strategy based on competition is a natural approach, but also a flawed one. Price competition implies scarcity—supply and demand market forces. There is no scarcity for ebooks because digital files are replicated practically for free."

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.

xarien• 14 years ago

You're comparing apples to oranges. You've even stated this particular fact in your post with the paper example. You state that one should not chose a pricing strategy based on competition, but at the same time, aren't you validating your own strategy based on the earnings of a competitor?

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.

ahoyhere5• 14 years ago

Jarrod's point in writing this essay was to question and counterpoint Sascha's original claim about the "perfect price."

sgdesign2• 14 years ago

Come on, that was only a catchy title. Of course I know that there's no such thing as a "perfect price"!

scottdw2• 14 years ago

Jason has a point:

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.

rushabh• 14 years ago

You can never make generalised comments on pricing. If higher prices are better then why newspapers are shutting down and bloggers are rising? Why are people using Linux? Pricing has nothing to do with Apple products. They sell because of their design and quality.

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.

sgdesign2• 14 years ago

Like many said, this is apples and oranges. First of all I had a very different product. My 40 pages eBook took me about 30 hours of work, including the promo site, whereas Jarrod's eBook is 130 pages long and has been in the works for quite some time now.

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…

studiofellow2• 14 years ago

Sure, it's an imperfect comparison, but it's the closest we're ever going to get through coincidence. Same launch day, same format, similar topic. The length is different and the authors have different-sized audiences, but we should be able to learn something from this, rather than write it off as "apples and oranges."

Perfect Pricing Part Deux – More money from fewer sales

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