Price high or price low? A comprehensive answer

by Hugh Hancock on May 1, 2012

There’s been a bit of a pricing theme in the IM blogosphere over the past few days. And no wonder – it’s an eternal question, and an eternal source of anxiety, late nights and heartburn.

Should you price your ebook low, attract hordes of readers, and make tons of sales? Or price it high, make the same amount of money and have less hassle?

There’s rarely a balanced answer offered to that question – most IM experts tend to fall into one camp or the other. (I’ll freely admit I’m generally a “price it high” guy).

But today, Jason Cohen of A Smart Bear writes a long, well-considered piece exploring when both options are and aren’t appropriate -

“Over the time scale of “years,” you can count on certain treads.

For example, the average cost of customer acquisition diminishes. Why? Because you get organized around marketing metrics, because your campaigns get optimized, because your landing pages and drip campaigns become stronger, because word of mouth produces sales “for free,” and so forth.

Another is that average revenue per customer increases. Why? Because new pricing tiers better segment customers, prices go up as reputation grows, you create add-on products and services, you create new revenue through business development, and so forth.

What’s not true is that you always unlock big growth drivers. Indeed, many companies get stuck at a certain growth rate which, while positive, eats too much money during its slow crawl to cash-flow-positiveness, and by the same math doesn’t generate interesting profits after that. Once profitable, at least that sort of company is creating jobs and still could unlock something someday, but of course an investor in general isn’t interested in that outcome.

So back to our two companies. Company A has demonstrated that some growth is possible, and where there’s 1,000 customers from a shoestring budget there’s likely several other growth drivers out there; anyway, one is unlocked. Which is more than you can say for B. So, along one of the dimensions which doesn’t automatically improve with time, A wins.”

Jason’s a software guy and a serial proper-big-company starter, but he offers a very balanced perspective here, and explains well just why you might want to go for either the low-cost high-volume option or the reverse – and the reasons aren’t what you’d expect. Indeed, this entire post is full of angles you might not expect, even if you’re reasonably experienced at this whole product creation malarky, unless you’ve also done the venture capital thing.

Personally, I found this post eye-opening, but it also confirmed nicely that my pricing strategy is indeed on the right track for me. For many people, I could well imagine that it’ll lead them to make a rapid pivot in one direction or another. For example, I’d never considered the market research advantages of the company with a larger customer base at less $ per customer, or how that plays into Lean Startup, Minimum Viable Product and even Four Hour Work Week methodology.

A really eye-opening, informative post, this one – even if you’re sure you know your pricing strategy backward, I’d still recommend it.

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