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.