Chapter 11

Testing Prices

In-a-Rush Tip

Don’t skip this critical chapter!

---

When you reach this chapter you should now know:

• Prices buyers are proven willing to pay for a product with your positioning and your benefits and negatives
• Your costs
• That you can earn an acceptable (hopefully great!) profit given the prior two points
• That you have considered buyer psychology in setting the actual numbers
• That you now have three to four very good prices from which to choose

What you don’t know, however, is that you are at a dangerous point in determining prices. A point where you could lose a lot of money! See the next section.

The Psychology of You—in Setting Prices

The problem is, you already have a strong feeling that one of your three or four prices is best. Am I correct? And you’re feeling this very strong urge to just run with that price.

There is too much money at stake for you to give in to that urge. You need to “test-drive” your three or four choices and let buyers tell you which one is best.

People buy for a lot of reasons, most of them focused on the product. Often the price is a very minor consideration. If you don’t test prices, you will blame any poor performance in sales on your price—when it very likely won’t be that at all. So you’ll waste a lot of time spinning pricing wheels when you may need to adjust part of your product.

Example:

• Suppose you set a price of $75 for your new product. And sales come in at about one-third of what you expected. If you haven’t previously tested prices that were lower, your gut reaction will be to lower prices—when that might not be the problem at all.
• This very thing happened to me on a product where I had foolishly not tested prices. So I lowered it to a price test of $65 and $67. But neither of those lower prices changed anything. Meanwhile, I was throwing away $8–10 profit from each sale at the lower price while I found out the price is not the issue.
• This also delayed my recognition that the real problem was the marketing message. Once I rewrote the web site material, sales moved up to 80 percent of what I had originally expected. And that’s where they’re staying.
  • Price was not a problem.
  • Marketing copy was a problem.
  • My sales expectations were also a problem—which can be expected when launching a completely new product!

A second psychological problem in people who set prices is a tendency to set too low a price. This is especially true in people selling services, such as consultants, freelance writers, designers, etc.

I bring this up because without testing prices, you are more likely to pick too low a price than too high a price. One of the best pieces of wisdom I gained from attending a newsletter publisher conference was this:

You are most likely to overestimate how many subscribers (buyers) you will attract, but to underestimate the price buyers will pay.

I have found this to be true in other industries as well. In fact, once I look at a company’s business or marketing plan, I almost always suggest lowering its estimates of buyers, as well as recommending a number of ways to bring in higher prices.

There is very little academic research on testing prices both higher and lower than the one calculated to be ideal. Among practitioners, testing both higher and lower prices is accepted wisdom. It would be hard to find an experienced direct response marketer who has not been surprised by a winning price that differed substantially from expectations. Examples:

• In 2005 I tested $37 and $47 for an e-book originally offered at $27. Despite the book being just 52 pages in length, the $47 price produced just 1.5 percent fewer buyers than $27—and a lot more profits!
• A test of the same three prices for a different e-book in a different marketplace—with over 100 pages—found $37 the most profitable price.

Can You Test?

The best, cheapest (usually free!) way to test prices is online. Unfortunately, some business simply cannot test online. They include:

• Consultants (unless you do 100+ of a single type of consulting job in a year)
• Custom manufacturers
• Bars and restaurants
• Hair salons and barber shops
• Sellers of very expensive equipment to businesses
• Sellers of anything where prices are traditionally negotiated

If You Cannot Test Prices

If you cannot sell your product online—even for a test—and/or cannot sell at least 100 units in two to three months, then you are stuck making your best guess from the three or four prices you previously identified.

My recommendation is to pick a price higher than the one you think best. I recommend this because of these reasons:

• It is easier to drop prices if you don’t see enough sales than it is to increase prices if sales are coming fast and easy.
• Even if you are determined to launch at one price, you can always set your price at the next higher number, then give an “introductory” discount down to the price you strongly think is best. This gives you two big benefits:
  • If sales come very easy, you can eliminate the discount at the end of the period and see if sales continue strong.
  • Your “sale” gives an incentive to buy that should boost sales higher than you would have seen without it.

The Difference between Testing and Research

While you will see many different definitions and distinctions between these two, the easiest for me is that testing requires you to actually try to sell your product or service. Research does not require this.

The last thing you want when you’re setting a price is research giving you people’s opinions about the right price. And there’s a lot of bad pricing research out there that does just that.

You’ve probably seen research that asks “What’s the highest price you would reasonably expect to pay for X?” The answer to this research is worthless—even if it’s put into charts and a professional-looking presentation.

Here’s why pricing research that asks for opinions is worthless:

Pricing research that is choice-based conjoint, which requires the respondent to select from different combinations of product or service and price, is the best we can do in pricing research.

Price testing, however, is pure gold. No questions for people to answer. Just an offering and a price. No questions on the results, either. You add up the number of buyers at each price and your total profits—and you have a clear and (assuming you follow the instructions in the next chapter!) reliable answer.