Pricing can be an incredibly advanced and complicated topic that has many books completely dedicated to it, but don’t let this scare you away.

The question most people ask themselves is:

“Do I price my products low, to get more sales volume and increase my profits that way, or do I price my products high, taking advantage of perceived value and thus increase my profits in this manner?

There is one really simple answer to this. It’s to TEST.

There are many different pricing strategies and models out there, and we will be looking at many of these in future, but right now the way to gain the most benefit for the least amount of time spent, is to test different offer prices.

There really is no way to know how your specific market and customers will respond to different pricing. When you make assumptions about pricing, in many cases you are leaving money on the table. The reality is that most people actually price their products to low.

The truth is that unless you are selling a commodity product that needs to compete with rock bottom prices, then you really do have a lot of flexibility when it comes to your pricing.

As we have mentioned before, your customers perception of your product or service will play a part in determining their own opinion of the “correct price”. There is usually a sweet spot which is the maximum value you can raise your price to while maintaining the same quantity of sales.

If you have an existing business making sales from an existing lead generation source (advertising for example), you can easily begin to test your current pricing by slowly increasing your price until sales start to drop.

The volume of sales you have will determine the duration you test a particular price. For example if you have many sales within 1 month, you could test a new price each month and have enough sales data to make accurate decisions, however if you have a high priced product that makes say 1 sale each month, you may only be able to test new prices every 6 months or so.

In most cases you will find you can increase your price a reasonable amount before you have any noticeable reduction in sales. This is already a quick win for you and will increase the value of each sale with very minimal effort.

Once you are ready to proceed, you can begin increasing your pricing, (making sure to track the results of each price point!) beyond the point where sales begin to drop, until you reach the point where revenue is exactly equal to your original lower price before testing began.

You will then analyze and graph the data and will easily be able to tell at exactly what price/volume ratio point you hit the highest revenue.

By doing this easy pricing test you can easily increase the value of each sale up to 50% in some cases over a small period of time, depending on your sales volume.

This would have cost you nothing but time, since you would have stopped the testing once you hit the revenue you began with in the first place. Except now, you have effectively increased the value of each sale in future indefinitely all else remaining equal.

Always keep in mind your profit margin when it comes to selling physical products or services.

Lets say you are selling a physical product and your test results in R20000 revenue at R200 per item and R20500 revenue for R450 per item. Obviously the R450 price made less sales then the R200 price to equal out at almost the same revenue, however the R450 pricing made exceptionally more profit since it would have a higher profit margin per item, and is thus the price you want to keep.

The other side to this is that you are not taking into account the back end sales, which we have discussed in part 1. For example let’s say the highest price made higher upfront revenue, but a lot less new customers, we may actually be making less in the long run due to less customers entering our back end sales funnel and taking advantages of our back end offers.

Thus it’s always best to test pricing and take into account all revenue generated for that customer BEYOND the initial sale. Or lifetime customer value (link).

This can take some time however as you need to track results over a long period of time.

To get the quickest results it is recommended to stick with price that gained you the highest number of new customers to revenue per sale ratio. If price 3 earned you R50k and got 200 customers, and price 2 earned you R35k but got you 800 new customers, price 3 may be the better option to stick with as long as you have a good back end sales funnel.

These simple tests can have incredible impact on your bottom line with very minimal effort, and no additional cost.

Once you have completed you price testing for your first initial sale, you simply begin the same exercise for your back end sales products, to further increase your revenue.

This may sound very simple but so many business simply don’t do this type of testing and will miss out on the easy rewards, so make sure you start doing this in your business right away.

Here are some tests and explanations from marketingexperiments.com

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:

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:

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:

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:

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/

1. 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.
2. 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.

1. 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.
2. 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.