|Offer Pricing Tested|
|Friday, 20 February 2004|
Topic: Offer Pricing - How to test and optimize your pricing
We recently released the recording of our Offer Pricing clinic. You can listen to a recording of this clinic here:
What if you could leverage a few simple tests to optimize the price of your online offer? How do you know if your price point is high enough to achieve maximum margins, but low enough to achieve maximum revenue? Consider this case history from our research files:
In new series of experiments, MEC worked with a leading psychiatrist and author to determine how to maximize the online sales of his new book.
The three price points we tested were:
Which price point was best? Which price point yielded the most revenue?
Here is what we discovered:
Our test consisted of four main steps:
This analysis helped us to identify the unique value proposition and redefined the market channel for our test site.
We did find three competitive books, but these were being marketed primarily through the mainstream online booksellers. These books were lost in a sea of digital generalization.
We decided to focus our search engine campaign on people looking for information on child psychology rather than people looking specifically for books.
The closest competitor was an informational site with books, articles, and videos.
First, we studied the metatags of potential competitors.
Then we studied the POPULARITY and the projected COST PER CLICK of likely search terms.
We identified several terms that were too expensive (and too broad) for our test purposes:
We identified five terms that were inexpensive enough for our testing purposes:
KEYWORD RESPONSE TEST
We conducted a (very brief) micro-test based on the inexpensive search terms that we had identified. Our goal was to determine the potential demand for the book.
We established that there was a significant demand for the information products we had tested. But what price point would yield the most revenue? (1)
We conducted a simple three-day pricing test. We used five search terms in just one search engine. Here are our projected results for a more comprehensive campaign (using more engines) over the same time period:
What You Need To UNDERSTAND: Based on click-through performance, it appears that the $7.95 price point was perceived as a lesser value and the $24.95 price point was too high. But because of the larger price point, the $24.95 offer actually generated the most revenue.
So what is the moral of the story? And which price point is best?
Consider one final example:
In a recent analysis of our own website's revenue, we compared e-book sales with our recurring membership fees to determine which could generate the highest yield. (In the past, we have tested membership price points at $7.95, $14.95, $19.95, $24.95, $34.95.)
Premium membership conversion ratio = 2%
E-Book conversion ratio = 8%
Moving to e-book sales would seem to be a significant improvement, but the numbers are deceptive.
The lifetime value of a customer for the e-book was $29.95.
The lifetime value of a site membership was $419.40.
We achieved three important insights:
Keeping these insights in mind, let's focus again on the book site. Which price point is best? Which price point would you choose?
We would select the $14 price point because it would allow us to gain 480 as opposed to 300 customers. And those customers can be worth more than a $3,825 gain (the difference between the revenue generated in the second and third price points).
(1) We are working on a report that will compare the actual results of the marketing with these test results. They were surprising.
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