We received several requests for more information on price testing subscriptions after our last Web Clinic on finding ideal price points.
Let me start by reviewing the concept of Price Elasticity of Demand (Ed), a measure of how much demand changes in relation to a change in price if all other factors remain the same.
• If demand is price inelastic (Ed < 1), a price increase increases total revenue and a price decrease decreases total revenue. Picture “necessary” goods or services or those without competition. • If demand is price elastic (Ed > 1), an increase in price decreases total revenue and a decrease in price increases total revenue. When there is a readily available equivalent product from a competitor you are likely to see elastic demand.
• If demand is price unit-elastic (Ed = 1), price and demand are offset.
In order to use your Ed calculation to further your business goals you need to have done some testing of your product or service at several different price points. The example we used in the clinic was a subscription offer at $69.95, which was the Control price, against $50, $59.95, $75, and $79.95. We tested for two weeks and knew how many subscriptions we sold at each price point during the test period. 20% of traffic was directed to each offer page. Our calculations showed that demand was inelastic at all price points compared to the Control: when price went down to $50 for example, total revenue went down; when prices went up to $75 and $79.95, total revenue went up. Demand for the online subscription during those two weeks was price inelastic.
But if we isolated the $75 price point and its total revenue and did an Ed calculation comparing it to the $79.95 price point and its total revenue, demand turned elastic: total revenue dropped as if we’d reached a tipping point. More data points from further price testing would be needed to prove we’d reached the point of elasticity, but the test results could be used to set a new price producing more revenue in the meantime.
The brief on the clinic was posted today and should be emailed to our subscribers today, too. The brief has links to two free Ed calculators in it.
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We hope to do more free clinics on online price testing in the coming year, so stay tuned!
I have attempted to build in price testing into my work with clients. Many are highly resistant to it – perhaps not wanting to face reality? Also, Ebay publishes a fair amount of information (for a small fee) about what’s selling and for how much. Often, at least for widget sales, you can get initial price points for experiment design based on buying behavior on there.