Strategy: The Price Is Right … or Is It?
The prices of thousands of publicly traded stocks change from moment to moment in response to even the slightest shifts in perceived value or buyers' ability to pay.
Similar market pressures impact consumers' perceptions of the value of virtually every product or service, yet many direct marketers change their prices infrequently, if at all.
The result: Your product may be overpriced, leading to lost sales; or underpriced, resulting in piles of dollars left on the table.
Frequent price tests are the only way to make sure your price is right.
Pricing Up or Down?
Every marketer must raise prices during the long term or face steadily declining margins. So, for most products in most markets, slashing prices is not the path to increased profitability. This is especially true in the current environment of rising costs for direct marketers, when every marginal dollar of revenue is essential.
Yet a down economy also means diminished resources for many consumers, leaving some marketers with few alternatives but to cut prices, at least in the short term.
Many marketers assume that if they increase prices, they will lose significant market share. This is not necessarily true. Creative, aggressive and frequent price testing will reveal profitable exceptions to this general rule.
So, do you need to cut prices in order to win more orders from cash-strapped consumers, or do you need to raise prices to keep up with rising costs?
The answers to these questions are essential to your business and can only be discovered through ongoing price testing.
Testing Price Perception
When thinking about price testing, focus not only on the total price a customer pays, but on the way in which price is presented.
For example, retailers know there's a significant difference in response and profitability between a product advertised at $500 and the same product listed at "$400 after $100 mail-in rebate." The customer perceives the price at the after-rebate $400 level, while the marketer reaps a price somewhere between $400 and $500, due to unredeemed rebates. (Which reminds me, I need to send in the $50 rebate on my cool, new phone before I lose the rebate slip or the UPC, or forget about it entirely as the marketer is hoping.)
Other effective ways to reduce the perceived price include installment billing and, in the case of subscription marketing, per-issue or per-month pricing.
A classic example of reducing the perceived price in consumer marketing is selling automobiles based on monthly payment. I've been guiding my 25-year-old daughter through her first vehicle purchase. The bank can't wait to sign her up for a 60-month loan on a used car. Meanwhile, dear old Dad is trying to tell her that five years from now, the car will have lost at least half of its value and she'll still be paying based on today's price. Yet the lender and the auto dealer have nearly convinced her that the vehicle is a good deal because she can afford the monthly payment.
Direct marketers can use the same principle to create a perceived price point based on installment payments. Here are a few actual price tests to stimulate your thinking along with profit-building results:
- Twelve issues of a gardening magazine at 99 cents a copy versus one year for $11.97. The per-issue pricing pulled 10 percent more orders while giving up a mere 9 cents per order ($11.88 versus $11.97). A dollar per copy has been another successful price point for many publishers, especially in tandem with a two-year term.
- Fifteen copies of a consumer newsletter for $1.97 each, versus 12 regular monthly issues plus three free special editions for three installments of $8. The per-issue price results in 23 percent more revenue per order ($29.55 vs. $24). Net response fell 10 percent, an acceptable outcome given the price breakthrough.
- A self-help book for three installments of $8.99 ($26.95 total) versus three installments of $8.32 ($24.95 total). The $8.32 price point arose from an earlier test showing that installment billing significantly outpulled the mention of full price. The book was initially priced at $24.95 in order to stay below the $25 barrier. But it turned out that the new price barrier was at the $9-per-installment level. The test result was virtually no change in response at the higher price point, but $2 more revenue per sale. The extra revenue was pure profit.
- $127 per year for a B-to-B newsletter, versus $97. Conventional wisdom suggests that breaking through an obvious price barrier such as $100 should have a profoundly negative impact on response. In this case, the higher price actually boosted response by 11 percent. Apparently, the higher price raised prospects' perceived value of the product very significantly. Compounded with the 31 percent higher price, this lift delivered 45 percent more revenue, a blockbuster of a result.
Price Tests You Might Have Overlooked
One of the most successful direct mail formats of the past decade is largely driven by price. The professional discount voucher is the control for many mailers, including The Wall Street Journal and Reader's Digest, a pair of publications that one would think could market more successfully with a long-copy approach. Yet for these and many other publishers, a format that relies on a highly discounted price is the hands-down winner.
Perhaps it's obvious, but any marketer using a price-driven marketing program should test very frequently to determine the ideal price point.
Dr. Marlene Jensen of PricingStrategyResources.com is one of the foremost authorities on direct response pricing. Author of "46 Ways to Raise Prices without Losing Sales!," "The Tao of Pricing" and "Pricing Psychology Report," Jensen has discovered many instances when test results defy conventional wisdom and create profit-building opportunities.
Tests suggested by Jensen's research include:
- Test different prices in different market segments. This can be done with techniques as simple as offering a discount to one segment and withholding it from another.
- Test whether your customers react to "magic numbers" in prices. Testing a price ending in a seven versus one ending in a five ($19.97 vs. $19.95) may sound trivial, but test results have shown up to a 10 percent variation.
- Increase your published price, and offer a discount.
- Test the consumer's favorite price point - FREE - by adding a premium to your offer.
- Test a "beat the price increase" offer. This works great when you've announced an actual price increase on a date certain. But it can also work to say, "Our costs are increasing, and we can't guarantee the current low price indefinitely. Order today while you can still lock in today's prices."
Of all the variables that go into the success or failure of any marketing campaign, price is perhaps the easiest to test - and often proves to be the easiest way to boost profitability. In an economy where almost everything seems a lot harder than usual, this is a great time to be testing prices.
Mark Everett Johnson is a freelance direct mail copywriter and author of one of the most successful letters in the mail today with more than 3.6 million units sold. He can be reached via e-mail at firstname.lastname@example.org.