A/B testing prices would be ideal when trying to find out how much people are willing to pay for your product. Unfortunately it's a rather risky practice, so doing it over time as suggested by Jacques may be a better approach.
If it works as well for any of you as it did for me you will not regret trying this.
It's amazing how much you can be 'off' about what your product is worth to your visitors if you do not do drastic experiments like this to figure out the range of prices that are acceptable.
I think we all subconsciously price based on 'cost+', we price based on what it costs us to provide a service, tack on a profit margin and then we round that to the nearest reasonable sounding figure.
But you should be pricing based on perceived value. Not on your costs...
And the perceived value may be a lot higher than is apparent to you as the creator of the product.
You'd be surprised how big the world really is. Plenty of people will have never even heard of you or your competitor. Good luck marketing your product to the point where you've gotten 100% saturation in terms of reaching your target audience. Even coca cola and google can't claim that.
In fact, they probably can, after all, they're the #1 global brand. And those that they haven't reached yet they probably can't sell to. But it can be quite surprising to hear people say 'google? what's that?'.
It still happens to me occasionally (but rarely), and it never ceases to amaze me that there are still people living under rocks thick enough to block out information like that.
Same with wikipedia, you'd think that the news is out by now. But there are still people that have never heard of it.
Random anecdote: Back in 2002 I spent a week in a village in rural Haiti trying to get an electric generator set up. We had car trouble between villages and our resident mechanic was fixing it on the side of the road, when a woman from a small hut came out and asked us if we wanted Coca Cola. She sold us bottles of Coke kept cool in a hole with a tarp over it. I've never looked at the Coke brand the same way since.
There are also a _lot_ of people who have heard of Wikipedia, and used it, but have _absolutely no idea_ that it's user generated and that you can edit it. They are generally pretty stunned when I demo it.
Hm. For truly niche software, I suppose I can see that, but for anything with more than even a few hundred customers, I don't think it'd last. Someone (like me, for example) would smell an opportunity and sell for less.
I suppose it's not a bad thing for you in the short term, but I'd caution against getting comfortable on the profit cushion, and reinvest in revenue sources that can't be taken away by the same opportunistic competitor.
I'm not sure how long 'it would last' would need to be for you to be convinced, but for me it has been going for about 6 years now since that conversation and it still works.
The interesting bit is that I was just as skeptical as you are (and probably even more so) and in the end decided that trying it was the easiest way to see if it was true or not.
The second time I was even more skeptical but then I figured 'in for a penny, in for a pound', just to be able to tell Richard that he was wrong the second time. But he wasn't.
It doesn't hurt to try though, and if it does work for you then it's free money, which is nothing to sneeze at.
Keep in mind that if your product costs you $2 to put out there per paying member and you manage to increase your sales price to $19.95 you've just gone from a 50% gross profit margin to 90%.
Understood, and I think I agree with you. I was thinking in terms of larger prices (i.e. $500 on up; I tend to work with custom and specialized software in my day job.).
I can almost guarantee you wouldn't build an entire product/website/SaaS just because you 'smell an opportunity' in a market 'with more than even a few hundred customers', would you?
How about pulling off what OXO did? They realized their products cut be copied and sold at a cheaper price. So they created their own competition. Just made a worse design, used cheaper materials, slapped on a new brand and put both lines on the same shelf.
That way you can market to two demographics and cover the market. Extra bonus is that you can use essentially the same underlying tech.
As long as your product is not actually identical to the competition, you'll be amazed at what little things count as differentiators for customers.
An anecdote:
My company produces a PDF reader for iOS+. There are, give or take, 20-30 competing products. One of them is iBooks, which is heavily marketed by Apple, a high quality product, and free. Most of the others are cheeper than us, but we're out-grossing and out-unit-selling many of them. There are at least a dozen products with non-zero day to day unit sales. One day before we went live in the App store I discovered that there were not one but two products with basically the same name as ours++.
We can't credit marketing for this either. To be frank, our marketing has been terrible. We've tried to build a better widget, but mostly I think it's that we have a slightly different widget.
From the perspective of a customer: I pay for Lighthouse and Github every month. Github offers issue tracking, and both Github and Lighthouse try to keep things pretty minimal, but I prefer Lighthouse. It just feels more like the bug tracker I would build if I decided to go down that road, and that's worth a few bucks to me every month.
++ We did our due diligence when we started writing the app... about a month in... before we started writing our user manual, but at about two weeks from launch we were in crunch mode and stopped checking anything. They were both released in this window.
Proposal for an ethical A/B testing process for price hikes:
A: The existing, lower rate.
B: Advertise a higher rate. After signup is completed and the customer is fully expecting to pay a higher rate, inform them that the newer rates haven't "taken effect yet" and they will instead be billed at the previous, lower rate. This preserves both experimental validity and ethical pricing.
Concurrently testing 2 pricing schemes for the exact same service feels sketchy or unfair (to the customer) to me–especially if its a 2:1 ratio ($5 vs. $4.99 I can understand).
I'm sure it doesn't fall under "price discrimination" but it still doesn't feel right ... should I not feel that way?
It's understandable that you feel that way. But really, it isn't sketchy. Think of the lower price as a discount that wasn't offered to everyone. The people who paid the higher price thought the value of your service was worth it...no one twisted their arm.
If you're really against it, don't test two at the same time. Just double the price for new customers and see how that affects signups.
It would certainly be considered illegal in some countries (France, I'm pretty sure) to have two prices at the very same moment, based on random, for the exact same product.
Do you have any idea as to why it would be illegal? In my country it's not at all unusual to see a product in a supermarket being sold at a discount price in a display at the front of the store, but at the usual price on the usual shelf.
I believe as long as it's a different physical store, it's probably possible to set a different price.
My impression (that would need more research) is that having two different prices for the same product at the same time inside the same physical store or on a website would be problematic; otherwise it's probably ok.
I think I really need to make more research - A/B pricing would definitely be interesting.
That's a really nice way to go about it, the 'plan' I gave is much more coarse (and assumes a single product). I'm really curious how this whole thing works out for you.
And I'm also really curious how many people will try the price doubling (once or more time) and will write about it.
