How Much is That Dog in the Window?

Red chihuahua dog near window.Pricing is as much psychological as it is economic. We are definitely not in the era where the low price leader wins the day. This was proven yet again by the research team at Marketing Experiments. They presented their work on optimal pricing in a webinar on December 10, 2014. Although their work was primarily focused on increasing subscription revenue there are tenants which apply to all pricing scenarios.

In subscription pricing we cannot focus solely on a single metric. This applies to other pricing situations as well. In their first test, subscription prices for a software as a service firm were lowered equally across the board. Primary goals for the test were to assess the price reduction’s impact to conversion rate and subscriber revenue. Base pricing for the control ranged from $49.99 (one month) to $19.99 per month for a 12-month subscription. Treatment prices were reduced 22%. Long story short, conversion increased 19.4% (from 3.6% to 4.3%), but total revenue dropped 9.7% ($19,425 (control) to $17,535 (test)). In this case the conversion increase was solidly outweighed by the price decrease.

Their second test focused on the addition of a $20 activation fee to a $6 per month subscription fee. There was no difference in conversion between the control ($6 per month) and the test ($6 per month + $20 upfront activation fee). However, revenue increased 99% – based on average lifetime customer value. The point being the impact of the activation fee, albeit painful, decreases over time and as the product continues to provide customers perceived value the pain of the fee is forgotten.

The crux of what Dr. McGlaughlin and his team found can be summed up in three key points:

1)  Avoid metric isolation – focusing on a single metric such as conversion rate can lead to poor decisions. In the table below you can see if the marketer focused on conversion and/or cancellation rates they would boat. Metrics are best used in conjunction to tell a story and in this test the best story is told by including total revenue.

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At the $3.99 price point the total revenue is maximized at $45,189, a 163% lift over the best converting price of $0.99.

2)  Keep an eye out for value deflation – discounting, especially when discounts are applied in sequence if the initial offer is not accepted can seriously damage the perceived value of the brand and lead to increased churn in subscription models. I saw this personally play out during my days in circulation for the Los Angeles Times.

3)  Beware of cost perception – cost is only one variable in the choice equation. We can alter material factors such as price, mental factors such as friction or the amount of cognitive energy it takes to consume a promotional piece, or both can be altered. A common suggestion that Marketing Experiments presents is to make it easier on the consumer to select a product and check out by reducing the mental friction. This can be accomplished in numerous ways including altering the presentation of images to make the eye path more linear; moving the check out box up in the ad; and highlighting “best value” options.

As a final note the researchers presented evidence of one constant in this ever changing world – that is the consumers determine the price they are willing to pay. It is our job as marketers to first establish brand value and then guide the customer to the ideal price.

Greg Timpany directs the research efforts for Global Knowledge in Cary, North Carolina, and runs Anova Market Research. You can follow him on Twitter @DataDudeGreg.

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