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Home arrow Site Optimization arrow Offer Pricing Tested
Offer Pricing Tested
Friday, 20 February 2004

Synopsis

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:

Windows Media Audio

RealMedia

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:

  • $7.95
  • $14.00
  • $24.95

Which price point was best? Which price point yielded the most revenue?

Here is what we discovered:

Findings

Our test consisted of four main steps:

  1. We conducted a competitive analysis.
  2. We identified the keywords with the most potential.
  3. We conducted a keyword response test.
  4. We conducted a pricing test.

COMPETITIVE ANALYSIS

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.

  • > They paid 17 cents a click for "bipolar" and they have third place (1st place is 19 cents).
  • > They also paid 5 cents per click for "bipolar children" and they are number 1.

KEYWORD ANALYSIS

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:

5 Expensive Search Terms
KEYWORD MONTHLY TRAFFIC 1st Position 3rd Position
depression 159,609 $1.61 $0.58
therapy 10,142 $0.24 $0.20
child depression 1,562 $1.00 $0.25
mental health 38,555 $0.52 $0.47
psychology 82,171 $0.35 $0.32

We identified five terms that were inexpensive enough for our testing purposes:

5 Inexpensive Search Terms
KEYWORD MONTHLY TRAFFIC 1st Position 3rd Position
bipolar 71,067 $0.21 $0.07
bipolar disorder 58,164 $0.22 $0.20
bi polar 19,411 $0.19 $0.17
child psychology 10,861 $0.11 $0.10
schizophrenia 63,819 $0.07 $0.05

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.

  1. We drove 648 clicks to our test landing page.
  2. The cost was approximately $0.11 per click.
  3. Of those 648 clicks, 84 customers pushed the order button or clicked on the "order" link attached to the book title.
  4. This equates roughly to a 13% conversion ratio.
  5. It is realistic to assume that some of these customers would abandon before ordering. But even if we assume a 50% abandonment rate, we are still looking at a 6.5% conversion rate on the pay-per-click traffic.

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)

PRICING TEST

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:

Micro-Test Orders Generated (Projected 5x)
PRICE POINT $7.95 $14.00 $24.95
ORDERS 1950 2400 1500
REVENUE $15,500 $33,600 $37,425

Check box 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.

CONCLUSION

So what is the moral of the story? And which price point is best?

  1. Pricing, especially in the service industry, is generally "discerned", not "discovered".
  2. It starts with an educated guess, is followed by a micro-test, and then becomes a "what can we get away with?" proposition.
  3. The right price lies along the axis of the most the market will bear and the most your product can bring.
    1. What is the most your market will bear? And at what price level can you bring the most to market?
    2. If your offer is worth X, could it also be worth Y?
    3. How would your offer need to change for it to be worth X to your CURRENT audience?
    4. Would the top 20% of your audience be willing to pay X percent more? And how would this impact your costs?
  4. The only way to zero in on your ideal price is by elevating it beyond the optimum and nudging it back down.

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:

  1. The $34.95 price point (with the trial offer) has the best conversion ratio.
  2. In actuality, the membership sales were 350% more profitable than the e-book.
  3. AND this does not include the additional revenue of $1,800 generated per member per year.

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).

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RELATED REPORTS:

Three Ways to Sell Online Content

Order Forms Tested

Abandoned Shopping Cart Recovery

Shipping Charges Tested

(1) We are working on a report that will compare the actual results of the marketing with these test results. They were surprising.

About This Brief

     Credits:

  • Editor — Flint McGlaughlin
  • Writer — Brian Alt
  • Contributors — Aaron Rosenthal
  • HTML Designer — Cliff Rainer

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