A Reminder: Lower Prices Can Make You More Money

from the hello-price-elasticity dept

This is certainly not the first time that we've tried to make this point, but it always amazes us how little people understand price elasticity, and the idea that a lower price can make you more money by increasing the quantity sold significantly more than the decrease in price. Instead, we hear claims by economically illiterate people about how lowering the price "devalues" the work. Of course, I've never understood how making less money devalues a work in the first place, but to each his own. Rafe Needleman has yet another story of how lowering your price can make you more money, playing off an older story he wrote, in which he was convinced by the developer of the ShareMouse app that people should be paying more, not less, for apps.

ShareMouse is $25, and Rafe thought it was too expensive, and suggested that the developer would make more money by lowering the price. But the developer, Gunnar Bartels, pushed back and convinced Rafe otherwise. First he argued that his product was better than the alternatives. Second, that lower price would lead to more support costs from less sophisticated users. And, finally, he pulled out the "developers gotta eat" card -- which doesn't make much sense if you actually can make more money by lowering the price. In the end, Rafe was convinced that perhaps Bartels had a point.

Except, now, months later, Bartels did experiment with lowering the price... and all of his arguments and assumptions fell apart.
For kicks, he offered a one-day $10 sale on Sharemouse.

“Holy cow!” Bartels wrote. Translation: He sold more licenses than the elastic pricing model predicted.

Part of the success of the trial can be attributed to the valuable marketing and promotion that came with the CNET post. Even so, Bartels says the sales figures were “overwhelming and surprising.” So he’s now planning on bifurcating the ShareMouse product line.
As for those concerns about the massive onslaught of stupid support questions? That didn't happen.
Bartels says that the expected downside of selling at the lower price, higher support expenses, has not borne out. “Maybe our product is so good,” he says.


Reader Comments (rss)

(Flattened / Threaded)

  1.  
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    Pixelation, Nov 8th, 2012 @ 10:32pm

    "Lower Prices Can Make You More Money"

    That's just crazy talk. Next you'll be suggesting that money can be made by selling single songs as opposed to entire albums. Complete nonsense.

     

    reply to this | link to this | view in thread ]

  2.  
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    Hephaestus (profile), Nov 8th, 2012 @ 11:13pm

    Re:

    Pixelation, that is almost as crazy as getting on the top 100 charts with out a label.

     

    reply to this | link to this | view in thread ]

  3.  
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    Anonymous Coward, Nov 8th, 2012 @ 11:53pm

    Re: Re:

    Or people wanting cars instead of horse drawn buggies

     

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  4.  
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    Anonymous Coward, Nov 9th, 2012 @ 12:44am

    Re:

    I know right? What's next, sliced bread???

     

    reply to this | link to this | view in thread ]

  5.  
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    That One Guy (profile), Nov 9th, 2012 @ 1:03am

    Steam sales anyone?

    Seriously though, one only has to look at Steam sales to see that the idea that lowering the price will inevitably lower profits is completely and totally bogus and tends in fact to be dead opposite of what does happen.

    A quick google search found this article:

    http://www.gamasutra.com/view/news/174587/Steam_sales_How_deep_discounts_really_affect_y our_games.php#.UJy8g2eV2So

    And you don't have to go down very far at all to get to the really relevant part...

    'According to indie developer and Super Meat Boy co-creator Edmund McMillen, these promotions can increase sales to an almost staggering extent. His 2D dungeon crawler The Binding of Isaac, for example, saw sales multiply by five when it was marked down by 50 percent, and once it hit the front page as a temporary "Flash Deal" (for 75 percent off), sales multiplied by sixty.

    Believe it or not, those figures aren't all that unusual. Valve's director of business development, Jason Holtman, says plenty of developers have seen their sales increase exponentially, giving them a very healthy boost in revenue.

    "It's not uncommon for our partners to see [a] 10-20 times revenue increase on games they run as a 'Daily Deal.' Some titles really take off and see as much [as a] 70-80 times increase in revenue," Holtman said.'


    So can we maybe put to rest the whole 'devaluing games' and 'lowers profits' myths now?

     

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  6.  
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    Suzanne Lainson (profile), Nov 9th, 2012 @ 1:05am

    Now if only Apple understood that

    While I would love to pay the lowest possible prices for everything, companies like Apple base their pricing strategy on charging premium prices with huge margins.

    It's luxury pricing versus commodity pricing.

     

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  7.  
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    Beech, Nov 9th, 2012 @ 1:11am

    "Of course, I've never understood how making less money devalues a work in the first place"

    I think the idea is that if you're selling a $10 string of binary, that even if you sell 10 times more copies at half the price, you will still lose out long run because now you tricked people into thinking that $5 is a good price for 1's and 0's. Now when you make your next string of digits you won't be able to sell it for $10 anymore because everyone expects such things to only be worth $5!!!

    Simply put, "devaluing" means moving the price closer where the market wants it instead of you being able to charge an arbitrary amount.

     

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  8.  
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    Winnerwaggon (profile), Nov 9th, 2012 @ 1:21am

    Re: Steam sales anyone?

    It depends on the product. You're right for a mainstream product.

    The ShareMouse "quality price" approach is also right for a niche product.

     

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  9.  
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    Zakida Paul (profile), Nov 9th, 2012 @ 2:46am

    Well Duh

    Lower prices mean you sell more and if you sell more you make more money.

    I would rather sell 1000 copies of an album at £5 than 100 copies at £10

     

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  10.  
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    PaulT (profile), Nov 9th, 2012 @ 2:47am

    Re: Now if only Apple understood that

    I assume you mean their hardware business rather than their reasonably priced apps and music? It's up to them what they charge, that's their prerogative and they're rather successful at the moment. The only problem would come if they started bitching about dropping sales without considering that their prices are too high, or claimed that lowering prices would somehow devalue the product. That's not happening, so what's the problem?

    I'm sure they understand that if they were to deliver a cheaper product, they'd make more sales. But sales are still rising at the current price point... I'd also point out that a hardware manufacturing business is very different to a digital software business, given that one has little in the way of marginal cost and the other has one hell of a lot.

    "It's luxury pricing versus commodity pricing."

    Indeed. While people are willing to pay for the luxury and feel that they're getting a quality product, so what?

     

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  11.  
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    Marcel de Jong (profile), Nov 9th, 2012 @ 3:07am

    Re:

    Better tell supermarkets about this when they put stuff on offer with lower-than-usual prices. Because now people will expect to always buy detergent for 2.5 bucks instead of 5!

     

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  12.  
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    Anonymous Coward, Nov 9th, 2012 @ 3:28am

    I have a Star Trek trivia book written by Rafe Needleman.

     

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  13.  
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    Anonymous Coward, Nov 9th, 2012 @ 3:55am

    Re: Re: Re:

    Now that is the true tragedy. Think of the unemployment among horses and the amount of welfare they draw from society. Maybe the automobile should be banned afterall. It is a disgrace for true capitalism!

     

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  14.  
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    Anonymous Coward, Nov 9th, 2012 @ 4:19am

    Re: Re: Now if only Apple understood that

    I think his argument is luxury pricing might be more widespread than commodity pricing and that it is not always reasonable to assume that price = quality.

    Calling music reasonably priced in iTunes, might not be exactly the words most people would use. The price is basically the same as buying CDs! While the price is not because of Apple, you have to figure that the completely fixed pricing in iTunes is a problem for people wanting to sell at commodity pricing or in other words, you are forcing out competition from the commodity market by introducing a legally dubious set price for anything of the kind. Basically it is technically a problem of deals happening behind closed doors. If this kind of deal was made in public, it would be an oxymoron (ie. it would not exist either because of the anticometitive behaviour getting thrown to court, people protesting very vehemently or politicians feeling they get too little a share of this market!).

    When copyright is used as an argument for warping a market to avoid commodity dealing, you are not only talking against the basic ideas of copyright. You are really talking up the mercantilistic ways that the western world went away from through the 18th and 19th century (Planed market economy like in USSR is actually close to the oldschool mercantilistic micro-management. As a european that is actually a main priority to avoid. So much for socialism being the demise of the old world!)

     

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  15. This comment has been flagged by the community. Click here to show it
     
    identicon
    out_of_the_blue, Nov 9th, 2012 @ 5:16am

    As usual, no surprises.

    "He sold more licenses than the elastic pricing model predicted." -- Then the "model" is wrong. Many "mathematically literate" people believe arbitrary "models" with such fervor that they deny common sense and even reality.

    "Part of the success of the trial can be attributed to the valuable marketing and promotion that came with the CNET post." -- THIS is quite likely the SOLE CAUSE. Advertising to potential new buyers, however gotten, does bring more sales. Curtail all your notions about piratey "economics" and go into plain honest advertising, Mike.

     

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  16.  
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    PaulT (profile), Nov 9th, 2012 @ 5:39am

    Re: As usual, no surprises.

    "piratey "economics" "

    You really have to stop inserting this lie into every comment you make. It's bad enough when the article even has any relevance to piracy. This doesn't, it just makes you look like an obsessed idiot.

    Anyway, to the "point" you're trying to make, it's actually a combination of factors. The additional advertising probably wouldn't have worked without the price drop, but then the drop alone wouldn't have helped if nobody knew about it. The developer was originally afraid of the price drop, fearing it would somehow "devalue" the product, but he found the opposite was true and he gained more customers. I fail to see how this isn't addressed in the article.

    Do you have any further comment to add that doesn't consist of attacks on imagined strawmen, or can you actually concede that Mike has written an article whose actual central point is sound? Again.

    "Many "mathematically literate" people believe arbitrary "models" with such fervor that they deny common sense and even reality."

    Yes, we refer to those people as the RIAA, MPAA, and all the other who reject new business models and a changing marketplace just because it affects the model they want to use. Those who actually attack and destroy their own market because they don't want to adapt to reality. Glad you agree with us for a change.

     

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  17.  
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    Anonymous Coward, Nov 9th, 2012 @ 6:23am

    Re: As usual, no surprises.

    Oh, good. Here I thought you'd finally slid off the curb and under a bus, ridding us of your presence forever. Glad to see you're still alive and kicking, no matter how moronic you come off as.

     

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  18.  
    identicon
    Anonymous Coward, Nov 9th, 2012 @ 6:41am

    Re: Re:

    I don't think he was asserting that this logic is logical :)

     

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  19.  
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    Anonymous Coward, Nov 9th, 2012 @ 7:58am

    Re: Re: Steam sales anyone?

    I challenge you to define "mainstream" and "niche".

    Typically i would define "niche" as a product marketed to only the people that absolutely need it or want it. Which seems like a silly idea when there are probably tons of people that could benefit from it that are simply willing to put up with the consequences of not having it

     

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  20.  
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    Anonymous Coward, Nov 9th, 2012 @ 7:59am

    This doesn't tell the whole story. Valve (they make games and run one of the largest game distribution platforms) has run some experiments on game pricing and... well I'll just paste the quote from Valve's owner here:

    from http://sporder.net/2012/01/06/gabe-newell-on-the-surprising-economics-of-modern-video-games/

    "Now we did something where we decided to look at price elasticity. Without making announcements, we varied the price of one of our products. We have Steam so we can watch user behavior in real time. That gives us a useful tool for making experiments which you canít really do through a lot of other distribution mechanisms. What we saw was that pricing was perfectly elastic. In other words, our gross revenue would remain constant. We thought, hooray, we understand this really well. Thereís no way to use price to increase or decrease the size of your business.

    But then we did this different experiment where we did a sale. The sale is a highly promoted event that has ancillary media like comic books and movies associated with it. We do a 75 percent price reduction, our Counter-Strike experience tells us that our gross revenue would remain constant. Instead what we saw was our gross revenue increased by a factor of 40. Not 40 percent, but a factor of 40. Which is completely not predicted by our previous experience with silent price variation."



    Given that this data was from a temporary sale, presumably one that gave the game some publicity, it seems a bit silly to jump to the conclusion that simply charging less lead to more copies sold.

     

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  21.  
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    Gene Cavanaugh (profile), Nov 9th, 2012 @ 8:00am

    Low pricing and support

    Aw, come on now! For expensive products, almost anything will cause me to seek support. I have an expensive item in for support now (great support group, really busy).

    For low-cost things, unless the failure rate is excessive, I simply throw them away. My time isn't worth an awful lot, but I can't waste it on trivia.

    So, high cost - expect to hear from me. Low cost - not likely.

    I suspect that is generally true.

    However, I seem to see fewer failures with low cost, mass production items, and more with high cost, more specialty type items, where they don't have enough volume to work out the bugs.

     

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  22.  
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    Suzanne Lainson (profile), Nov 9th, 2012 @ 9:27am

    Re: Re: Now if only Apple understood that

    What I am saying is that some companies intentionally set their prices high because they pitch their products as high quality, expensive products. Apple has done well that way. It could definitely make them cheaper because they have huge margins, but for the moment at least, they choose not to.

    Therefore, I don't think every company is going to go the "lower prices can make you more money" approach.

     

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  23.  
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    iambinarymind (profile), Nov 9th, 2012 @ 9:45am

    Economic "Mathematical Models" Can't Work....

    The idea that a precise mathematical model can predict human action is an illusion.

    This is because there are no constants in human action other than the fact that, as Ludwig von Mises stated in his human action axiom:

    Human action is the purposeful employment of means to achieve ends in accord with the actor's values. The existence of action is axiomatic; the very attempt to deny it will result in its affirmation.

    No individual can know everything every person on earth is thinking and what they value at any time; nor can one predict what an individual's future knowledge and how said knowledge will effect what they value at such point in time.

    For more on sound economic theory, I highly recommend "Economic Science and the Austrian Method" by Hans-Hermann Hoppe (available for free over at mises.org).

     

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  24.  
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    John Fenderson (profile), Nov 9th, 2012 @ 9:57am

    Re: Low pricing and support

    I suspect that is generally true.


    There's a lot of interesting studies that suggest your suspicion is misplaced. The effect of pricing is actually a fascinating sociological phenomenon and has been studied for a very, very long time.

    One of the general trends that is observed is counterintuitive: generally, everything else being equal, people will complain more about the lower priced goods than the higher priced goods.

    A lot of factors are involved in this, but it appears that one of the stronger ones is related to another counterintuitive thing: that consumers who are dramatically overcharged for something are much less likely to complain about it, and much more likely to recommend it to others, even when it totally sucks.

    The main hypothesis for why this is is simple: ego. People don't like admitting to being ripped off and will lie to themselves and everybody else to avoid having to face that fact. It's the same reason that most victims of confidence schemes never report them.

     

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  25.  
    identicon
    Anonymous Coward, Nov 9th, 2012 @ 10:38am

    Re: As usual, no surprises.

    Models in business breaks down when you get too many different kinds of people through the doors. It is not that surprising.

    As for advertisement vs. pricing, I would challenge you to find data to proove that claim. For anyone knowing the math, the effect of advertisement is even more dubious than the choice people make of buy or don't buy. However, I would claim that looking at number of visiters at the site and the number of sales in a period with normal price and a period with lower price could give you an idea about the effects.

     

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  26.  
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    John Fenderson (profile), Nov 9th, 2012 @ 10:38am

    Re: Economic "Mathematical Models" Can't Work....

    This is correct when talking about individuals. However, large groups of people are amazingly predictable and can be modeled with very useful accuracy. The larger the group, the more accurately you can predict it. Of course, it's never 100%, but it is more accurate than predicting the weather.

     

    reply to this | link to this | view in thread ]

  27.  
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    Cerberus (profile), Nov 10th, 2012 @ 12:33pm

    Re:

    But what if selling your next string at $10 is a bad idea for you? If your total profits are much higher at $5, then being deluded into selling it at $10 would be bad. Then this "devaluation" caused by cutting the price of your first string is actually a good thing for you. Devaluation then only means "lowering the price" of your products.

    So you are never "able" to charge an arbitrary amount in that you will make the largest profit that way: you just do it, or you don't.

     

    reply to this | link to this | view in thread ]

  28.  
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    PaulT (profile), Nov 11th, 2012 @ 1:23am

    Re: Re: Re: Now if only Apple understood that

    "Therefore, I don't think every company is going to go the "lower prices can make you more money" approach."

    Was anyone suggesting they would?

     

    reply to this | link to this | view in thread ]

  29.  
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    Suzanne Lainson (profile), Nov 11th, 2012 @ 9:17am

    Re: Re: Re: Re: Now if only Apple understood that

    Was anyone suggesting they would?

    I just wanted to point out that pricing is a complex issue and that in some cases a higher priced item does sell better. As I said, there's commodity pricing and luxury pricing and identical items can be perceived differently based on how they are priced. For some items you will actually sell more if the price is higher because the higher price conveys quality even if there is actually no difference in the lower and higher priced product.

    I suppose what you can conclude is that sometimes lower prices sell more items and sometimes higher prices sell more items.

    Apple is the ultimate example right now of a company that sells items for premium prices and its strategy is working very well.

    A classic case is wine. Tests were run indicating that the higher the price of the wine, the better people thought it tasted even when the lower and the higher priced wines were the same.

     

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  30.  
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    Raven Ocara, Feb 11th, 2013 @ 9:22am

    Lower Prices

    Why is everyone against this? I don't see how this is foolish. The way I see it is this: If you lower your prices, people buy more, thus increasing your stock and marketing. I think it would work out better with more people buying because of the lower price, instead of few people buying from the higher price.

     

    reply to this | link to this | view in thread ]

  31.  
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    Mary Savery, Dec 11th, 2013 @ 1:39pm

    Competition < You

    You have to know when to make changes for your business when competition is pressing down on you. Another blog has a similar article: http://thewire.cableone.net/3-situations-when-you-shouldnt-lower-your-price/ which is similar to yours.

     

    reply to this | link to this | view in thread ]

  32.  
    identicon
    gibson, Mar 3rd, 2014 @ 1:02am

    requesting

    Am really very confuse. I want to lower down my price 20% because so many people want it at dat very particular price.

    But again am scared of my current customers because the will feel the were cheated and all that, and other factors being discussed by all of you Guys.. Please i need a professional to really advice m̶̲̅ε̲̣.

     

    reply to this | link to this | view in thread ]


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