Are You Making the Most Common Pricing Mistake?
In my hurry to launch my first product, an eBook called The App Design Handbook, I almost made a mistake that would have cost me over $10,000, a mistake that I see being made with products all around the web. Luckily for me, a few people were kind enough to lead by example and show how important it was to fix this.
No, the mistake is not charging too little, though that is a very common mistake as well.
The mistake is to have only one price for your product.
Pricing Based on Value
I’m sure you’ve heard that you should price based on the value your product delivers, rather than another metric like how long it took you to create it. This is very true, but has one issue. The value changes for each person.
One of my customers may use my design advice to improve sales for their niche iPhone app, whereas another customer may work for a large developer with a very popular application.
The value is radically different for these two customers. So, if we are truly pricing based on value, we should give the customers who get more value from the product a method to pay more for it. That’s where multiple prices come in.
The customer who is working on a team with a larger budget will easily pay more if they think it will help them. After all, if you have the company credit card out and have made a decision to purchase, there isn’t a difference between $40 and $140. At least not to that customer. To me, as the seller, I just made over 3x as much on that sale.
If you are selling to businesses, it is very important to understand how purchases are made for your type of product. Learn where the threshold is for companies to spend petty cash versus having to get a manager to approve the purchase. So long as your product demonstrates clear value and is below the maximum the employee can spend without manager approval, it doesn’t matter what the price is.
Since information products aren’t physical, it can be hard to know what they are worth. As consumers, we usually determine worth by comparing to other similar products. In the case of my eBook, the closest thing a consumer might compare to is a Kindle eBook. That sets the price somewhere under $10. After all, it’s a digital product, without printing costs, so why should they pay more than they would for a physical book?
It’s hard to make a good profit selling that low, so I never want the customer making that comparison. The customer will compare it to something, so let’s control what that is.
If I tell you the book is $39, you need to compare the value to something else, something which I don’t have control over. But if I tell you the book is $39, but for $79 you can buy the book plus all these great videos and code samples, then you are comparing the two packages to each other. All of a sudden $39 sounds reasonable, and you are trying to decide if the extra value in the $79 package justifies the price increase.
By adding a second offer, at a different price point, I completely changed the conversation.
If I add a third option at $169, then it changes the conversation again. Through bracketing I have driven the focus towards the middle package. While $79 may have seemed expensive before, now it is reasonably in the middle.
William Poundstone, in his book Priceless: The Myth of Fair Value, talks about offering three options with this story. (I am quoting from ConversionXL, since I want you to read their article as well.)
People were offered two kinds of beer: premium beer for $2.50 and bargain beer for $1.80. Around 80% chose the more expensive beer.
Now a third beer was introduced, a super bargain beer for $1.60, in addition to the previous two. Now 80% bought the $1.80 beer and the rest $2.50 beer. Nobody bought the cheapest option.
Huh, that’s actually not good. The seller actually lost revenue in this case through bracketing. But that’s because he bracketed his price down. The story continues.
Third time around, they removed the $1.60 beer and replaced with a super premium $3.40 beer. Most people chose the $2.50 beer, a small number $1.80 beer and around 10% opted for the most expensive $3.40 beer. Some people will always buy the most expensive option, no matter the price.
So by bracketing the price up, meaning that the third price point was the highest, not the lowest like in the first example, revenue increased, showing that through bracketing you can push people towards the middle option.
Now, that is the theory part of the article. It played out a little different in practice for me, and I am still trying to figure out why. I’ll get into that below.
So far we’ve been adding price points with more and more success, so where does it stop? It stops at three. Adding too many is just going to cause confusion. If you give people too many options they may just add one more of their own: to walk away and not buy at all. So, keep it simple and have three or fewer packages.
Note: I should add that I have a fourth pricing option for my new book, Designing Web Applications. I want companies to purchase bulk copies for their entire team, so I plan to add a 50-seat license for $1,000. Since this won’t even be considered by 99% of the purchasers, it will be at the bottom and visually different from the rest of the packages. Who knows, it may even help anchor the price.
The Extra $15,000
Now let’s get into how these ideas made me an extra $15,000. As I write this, my book, The App Design Handbook, has been available for 8 weeks. Only including sales through my site (meaning the numbers from deals on Dealotto and AppSumo are excluded), the book has made $30,697. Let’s take a quick break to say that yes, you can make a living selling products online.
Anyway, back to pricing.
I offered 3 packages (see the screenshot below for details); each higher package had more features and delivered more value than the last. Here is the package breakdown and how many sales from each:
- The Book ($39) – 226 copies sold
- The Book + Videos ($79) – 137 copies sold
- The Complete Package ($169) – 100 copies sold
I was actually a bit surprised based on these results. I thought that the lowest package would sell the most, with the middle package as a close second. That’s actually how it started the first week, but since then I’ve sold many more of the lowest package.
What gets more interesting is when you look at revenue from each package:
- The Book ($39) – $7,354
- The Book + Videos ($79) – $8,923
- The Complete Package ($169) – $14,420
So the package that sold the least generated almost 50% of the revenue. Nice!
(By the way, don’t try to multiply the sales price times the copies sold. I had a launch day sale, so those numbers won’t make any sense.)
The Impact of Multiple Price Points
Since I still kept my lower price of $39, my higher prices didn’t exclude anyone from purchasing.
So, let’s redo these numbers assuming that I only offered the lowest price. The fact that I ran a launch day sale at about 25% off makes direct comparison rather difficult. So I am going to find an average low price by dividing the revenue from the lowest package ($7,354) by the number of sales (226) to get an average price per copy of $32.50.
This assumes that if I didn’t offer the higher packages then everyone would have purchased anyway, but at the lowest package, since it is the only thing I would have offered. I sold a total of 463 copies at all price points. 463 multiplied by $32.50 is $15,047. This is my estimate of how much I would have made with only a single price point.
Compare that to my actual total with multiple price points of $30,697, meaning that multiple packages increased my revenue by over 200%. That’s insane. That seemingly minor change is what changed the product sales from being a success, to being a blockbuster (from my perspective).
Now, I could have increased the price of my single product, which presumably would have increased revenue above the estimated $15,047, but I didn’t want to price too many people out of the product. By adding additional packages, at different prices, I still allowed everyone to purchase the book, but I gave those who were willing to pay more an opportunity to do so.
You may be thinking that if three packages worked so much better than one, should we try five or ten packages? Unfortunately it’s not that simple. The Jam Study (as its been nicknamed) showed that when given too many options, fewer purchases were made. Quite simply, when a customer had 24 jams to choose from, 3% made a purchase. When they only had 6 jams to choose from 30% made a purchase. If you offer customers too many choices they can become paralyzed by the decision and just walk away (online the equivalent behavior is to hit the back button).
Personally, I like to limit the packages to three or fewer. Though you should test this with your own audience.
I am so glad I didn’t make the mistake of only having a single price point. On your next product make sure you don’t either.
Oh, and if you want to see another one of my pricing pages in action, take a look at my latest book, Designing Web Applications.
What has been your experience with having different price points on your products and services online? Let us know in the comments below this post.
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