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Home arrow Site Optimization arrow Price Testing
Price Testing
Thursday, 27 October 2005

Synopsis

Topic: Price Testing — Do you know how to price your products or services to achieve the highest revenues? Our research suggests that you may never know unless you test.

We recently released the audio recording of our clinic on this topic. You can listen to a recording of this clinic here:

Price Testing

Which will generate the most revenue? A lower price that drives more traffic and buyers? Or a higher price that may attract fewer buyers, but deliver more income per sale?

Our testing tells us that the answer to those questions is: "It depends."

In this brief we will review the data from two separate tests and show you how a lower price beat a higher price, and vice versa.

Here are three points to consider as we present these test results:

  1. Unless you are selling a commodity or a product that competes in a market ruled by rock-bottom prices, there is always some flexibility in your pricing. So you do have the opportunity to test.
  2. Finding the best price for a product, service, or subscription is both a science and an art. A prospect's perception of your product or service will play a part in determining their own opinion of the "right price." However, the price itself can also have an impact on how the product or service is perceived, thus creating a kind of causal loop. Within this loop, you have to find the price point that brings you the highest revenues.
  3. A very small difference in pricing can have a huge impact on your revenues. This is particularly true if you sell high volumes, or if you sell a subscription which could continue for years.

Findings

Experiment #1:

In our first experiment, we worked with a leading psychiatrist and author to determine how to maximize the online sales of his newly published book.

The three price points we tested were:

  1. $7.95
  2. $14.00
  3. $24.95

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

To answer these questions, we conducted a simple three-day pricing test. We drove a large volume of traffic to our site using just five search terms on Google AdWords. Using an A/B/C split test, we evenly distributed this traffic to three pages showing different pricing information.

Here are the results of this three-day micro-test:

 

Pricing Micro-Test #1
  $7.95 $14.00 $24.95
Orders 390 480 300
Revenue $3,100.50 $6,720.00 $7,485.00

Check box What You Need to UNDERSTAND: Based on number or orders, it appears that the $7.95 price point was perceived as a lesser value and that the $24.95 price point was too high. The $14.00 price point generated significantly more orders. But because of the larger price point, the $24.95 offer actually generated the most revenue.

An important additional point: the higher price on the same book created a much higher profit margin, which resulted in greater profit generated on less physical units sold.

KEY POINT: For physical products, profit margin should always be taken into account. For subscription-based services, this is much less of an issue.

However, marketing costs should always be taken into account. In our next experiment, we weigh the pay-per-click (PPC) marketing costs against the revenue generated.

But first, one final note on this test: It is important to weigh the benefits of additional new customers against that of higher revenue. In the example above the additional 180 customers at the $14.00 price point may actually be worth more in the long run than the additional $765 of immediate revenue generated at the $24.95 price point. In other words, the additional revenue made in subsequent sales to these customers may more than make up for slightly less revenue on the first sale.

KEY POINT: It may be to your greatest advantage to select a price that generates slightly less revenue if that price also generates significantly more new customers. The average lifetime value of your customers and your ability to make additional sales to them will be the determining factors here.

Experiment #2:

In this test, we used three different price points for a paid-subscription site. Again, we split the traffic evenly between three landing pages. The only thing that was altered was the price.

The three subscription price points we tested were:

  1. $10.00 per month
  2. $12.50 per month
  3. $14.95 per month

Here are the initial testing results gathered over a four-day period:

Pricing Micro-Test #2
  $10.00 $12.50 $14.95
May 29 Orders 33 19 15
May 30 Orders 30 21 18
May 31 Orders 49 29 16
June 1 Orders 44 25 25
Total Orders 156 94 74
Total Revenue $1,560.00 $1,175.00 $1,106.30

Check box What You Need to UNDERSTAND: The $10 price point generated 33% more revenue than the next best price point.

Here is an ROI analysis of all three price points based on a $0.09 average CPC:

Test #2 Return on Investment
  $10.00 $12.50 $14.95
Average CPC $0.09 $0.09 $0.09
Marketing Cost $808.02 $808.02 $808.02
Revenue $1,560.00 $1,175.00 $1,106.30
Profit $751.98 $366.98 $298.28
ROI 93.06% 45.42% 36.91%

Check box What You Need to UNDERSTAND: While the PPC campaign remained profitable at all three price points, the ROI generated on the $10 price point was more than double that of the next best price.

When ROI is calculated, it becomes even more obvious that the $10 price point is significantly better than the more expensive prices. And these numbers do not take into consideration recurring revenue.

These results are even more dramatic when you factor in recurring revenue:

Test #2 Projected Revenue
  $10.00 $12.50 $14.95
1 Month $35,100.00 $26,437.50 $24,891.75
4.5 Months $157,950.00 $118,968.75 $112,012.86
6 Months $210,600.00 $158.625.00 $149.350.50

Check box What You Need to UNDERSTAND: At a 4.5-month average subscriber lifetime, the $10 price point generated 32.8% ($38,981.25) more revenue than the next best price point. However, because of the increased retention, the $10 price point actually generates closer to 77.0% ($91,631.25) more than the $12.50 price point.

What's important here is that in addition to generating more sales, the lower price point also increases retention, which creates even more profit over the long term.

KEY POINT: For subscription-based sites, consider selling long-term memberships as well. For more on this topic, see our report on Subscription Revenue.

Even with retail sites, the lifetime value of a customer shouldn't be ignored. The additional sales you can make to existing customers may be significantly more valuable than the immediate additional sales.

In these two tests, we have seen that intuition cannot be relied upon to predict optimal pricing. Sometimes a higher price creates more revenue, while other times a lower price will generate not only more immediate sales, but more recurring revenue as well.

We have provided a downloadable spreadsheet tool that helps you calculate your revenue and profit for a number of price points:

MEC Price Testing Analysis Tool

In our recent web clinic, we covered the functionality of this spreadsheet in great detail. Download the clinic recording, Price Testing Clinic.

While testing your product or service pricing, keep the following key guidelines in mind:

  1. If you are selling a physical product, you will need to know what your competitors are charging for the same or a similar product, and get a feel for whatever "added value" a prospect might perceive when buying from you instead of anyone else. Is your brand stronger? Is your reputation stronger? Do people trust you more? Is your service superior? Do you provide services or bonuses along with the product? Do you offer better deals on shipping costs or warranties? All these elements can influence the perceived value of your products.

    For retail products, one excellent way to see what your competitors are charging is to go to a price comparison site like http://www.PriceGrabber.com/

  2. If you are selling a service or subscription, it is harder to make such a clear comparison with competitors. The perceived value of your service will depend on many factors. In the case of a service or "soft good," like an ebook, you should test a much wider range of price points.
  3. For a product, a service, or a subscription, one key goal is to find the price that is "too high." In other words, keep raising the price until the results clearly show you are charging too much. Then slowly inch back from there until you find the highest price the market will bear, giving you the highest revenue on sales.

    However, note that this highest effective price point, which will have the highest profit margin, may not necessarily be the best way to generate the greatest amount of new customers, as has been noted above.

    KEY POINT: If you haven't overcharged at least once, you may not be charging enough. Always take a price test beyond where you think the consumer's threshold is. The only way to zero in on your ideal price is by elevating it beyond the optimum and nudging it back down.

  4. Conduct reliable A/B split testing on your pages, and test for a long enough period to be sure of the validity of your results.
  5. Once you have found your optimum price point, try testing it again a few months later. Markets keep changing, and today's best price may not be the best price six months from now.

When evaluating your offer price, intuition will usually fail to deliver the ideal results. Testing is the only way to determine which approach will produce the most profit: a lower price that drives more traffic and buyers, or a higher price that may attract fewer buyers but deliver more income per sale. Every business is unique, and the above testing guidelines will help you determine your own ideal pricing structure.

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RELATED MEC REPORTS:

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Literature Review

As part of our research, we have prepared a review of the best Internet resources on this topic.

Rating System

These sites were rated for usefulness and clarity, but alas, the rating is purely subjective.

* = Decent | ** = Good | *** = Excellent | **** = Indispensable

About This Brief

        Credits:

Editor — Flint McGlaughlin

Writers — Brian Alt
Nick Usborne

Contributors — Jalali Hartman
Aaron Rosenthal

HTML Designer — Jeremy Brookins

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