"No matter what price we choose, we always make the same revenue"
plus.google.com>> I attached two charts to illustrate that. I recently lowered the price of the iPad app (http://bit.ly/92xWv1) from 5 to 1 Dollars.
Try $3. I think it was a coincidence $5 and $1 had the same revenue. The maximum revenue price point should be in between. // guy who studied first year microeconomics.
Not necessarily in between, you'd have to draw a demand curve at various different prices to determine the optimum // guy who is studying economics
He said "in between", not "exactly half way". The best way to draw a demand curve would be to get some data at the half-way point. // random person on the internet
The optimum point might lie outside. The curve might even dip in between the two price points.
Edit: The operative word here is 'might'.
Yes, it might.
But presumably the authors wants to maximize revenue while conducting experiments. Pricing at the midway point would seem to be the lowest risk way of getting additional data.
True, but wouldn't you agree that nl's suggestion is the maximum likelihood guess?
So, of the people paying $1 for the product, you know that half of them would gladly pay $2?
Sounds like it's time for 2 versions of the product : (i) The almost-full-featured version ($1) and (ii) The super-duper gold-plated version ($2). The removed feature doesn't even have to be very useful : You might lose 10% of the $1 value people, but snag 25% of the $2 value people (who just want some justification for paying the full value to them).
Apple's simple take on this may be revealing:
iSomething = $X iSomething+ = $X+100 iSomething++ = $X+200I've always wondered about the sales ratios of iSomething+ versus the other two. It seems to be that most people either want the cheapest, or the best, and that the mid-range exists primarily as a stepping stone to convert the former buyers into the latter.
I think many people want the second-cheapest (psychologically: good value, but not the worst), or the second most expensive (high quality, but not extravagant).
This is especially true when "iSomething" is free. A lot of folks will want to 'buy in' to the software, out of guilt or gratitude, so will pay for "iSomething+" even if the delta is trivial.
I think that's the future pricing model for a lot of software products.
Think of games, for example, where you could sell the basic version for $5, then big chunks of DLC for a few dollars apiece. So you get your game into the hands of anyone willing to pay a small fee, in the hope that those who like it will continue to pay additional small fees for more content.
so, shareware
It's hard to do that with a product that's specialized in removing features
So charge more for removing even more features. Call it Zen instead of Pro.
charge more for the zen version, add extra features for the cheaper version.
You're joking obviously, but I wonder if this has ever been successfully applied in some form or other.
Sony and other computer manufacturers will charge you more to deliver the computer _without_ the "bonus" software they usually include.
(Yes, it's probably a matter of the bonus/bloatware/crapware makers paying the manufacturer to include it vs. customers paying more to not. Flip side is a lot of that stuff _is_ useful, but many users just don't want it there to start with.)
Good example.
I've just realized I saw something in my line of work too. One of our customers is planning to sell a premium version of their product that has their logo removed.
This.
Joel Spolsky wrote a pretty good piece on capturing the consumer surplus: http://www.joelonsoftware.com/articles/CamelsandRubberDuckie...
No, it was total revenue that returned to previous levels after the initial spike, not volume. Approximately five times as many people were willing to pay $1 as were willing to pay $5.
I actually see that a lot in the appstore.
mostly unrelated but: could the parenthetical after the title of a post be modified to include subdomains? Seeing (google.com) made me think Google was saying "No matter what price we choose...", whereas if it said (plus.google.com) I'd realize it's likely just a "blog" post by somebody.
edit: or is there a good reason we shouldn't do this?
I upvoted you because I do agree it is a bit confusing. That being said, whenever it is something official from Google it tends to be on one of their blogs (Blogspot) (e.g. googlecode.blogspot.com, googleblog.blogspot.com, etc.). For blogs, HN captures the subdomain since the blog's name is captured within it. In the case of Google Plus, knowing that it is Google Plus (plus.google.com), we would still be hard pressed to know which user/person is posting.
God forbid, Google starts posting their product news/updates on Google Plus. Then, I would heartily agree with your solution.
A fine example of the price elasticity of demand. Not surprising in the slightest, but a helpful real-world illustration.
Actually, I found it surprising because almost all theoretical economic models seem so divorced from reality that nothing ever works as you expect.
"All models are wrong, but some models are useful".
Even though the axioms (assumptions) for rational choice are rarely met completely in practice, understanding their implications were they to be met is still highly useful.
Well, it means that the demand curve (units demanded as a function of price) is proportional to 1/price for a large range. That seems pretty unusual, since the general idea of price elasticity is compatible with any curve decreasing with price, i.e. 1/price^2, 1/sqrt(price), 1/e^price, etc.
Thank you; you're right. It's not surprising that there is some relationship, but what is actually surprising is that the relationship would so closely match an idealized, particular relationship (unitary elastic demand). (And this should have been obvious to me, since the general use of the demand curve is not, by any means, to prove to people that the price they choose doesn't matter.) I'd edit my original post if I were still within the edit window.
Its easy then. Keep the price high and it will lower your support costs. Make more profit.
But if your growth is in some way viral/exponential due to word of mouth/recommendations, then you're better off having 5x as many users today.
In very crude terms: $1 x 5x5x5x5x5 is a lot more than $5 x 1x1x1x1x1x1
Specious bit of hand-waving featuring made-up numbers. My rule-of-thumb is to disregard people who plead virality, especially if they call themselves marketeers.
High sales get you into the top 10 lists which is really worth having (you can call that viral if you're desperate), otherwise high sales increases both the support burden and the likelihood of negative reviews.
However, an app like this has niche appeal (writers) and there is no doubt that exposure within that niche is beneficial. So word of mouth is important, but is not gained by simplistic approaches. Promotion within the niche is likely to be more productive than promiscuous price cutting. For a game, a different strategy would be appropriate.
On the other hand, there is a limited pool of potential customers in this world. If you have a pool of 100, better to sell 10x for $10 today than 100x for $1. In the first scenario, you have 90 more customers to pursue tomorrow. In the second, you either need to make a new unrelated product with a new purpose or different audience (ex. Sony), expand your audience (Nintendo + Wii) or invalidate/depreciate the old one (Apple) to secure any more sales.
Edit: I forgot, there is also, extend your product (DLC)
If it were, revenue would be going up. Did you read the article?
Not unless you want to build up your audience for future products.
The author is falling victim to the Confirmation Bias. There are only two experiments, yet the author is content to over-generalize and conclude that "no matter what price we choose, we always make the same revenue." Why not reduce the price 3/4? Increase it by 50%? Increase it by a 100%?
Is this why products often enter market at a high price, which is then lowered gradually?
To clarify xenophanes comment: steadily lowering the price will provide a degree of price discrimination which takes advantage of any demand curve which decreases with price. The OP is talking about a very special case where demand is proportional to 1/price.
No, that's for price discrimination.
Isn't price discrimination what this developer should want though (assuming he's interested in maximizing revenue)? I.e., getting people who are willing to pay more to do so, while still getting revenue from people who aren't willing to pay as much?
I thought that was Zash's point anyway.
I think Writer is a pretty successful app that is in the charts (and Apple may have also promoted it at various times). Maybe the dynamics are slightly different for less successful apps that are less exposed in the App Store?
I noticed a similar trend from my much less successful app. I tried price variations from $0.99 up to $10. It seemed that no matter what price I set, I would average sales of around $10 per day.
The trend lasted for quite some time until someone released the app onto the pirate channels, at which point my sales almost disappeared. I guess a free option can change the dynamics.
For one of our app, which was selling well, we eventually doubled the price.
Revenues started growing, month after month, and stabilized after about 6 months.
Conclusion: revenues more than doubled, units sold slightly increased.
A question that's important to consider is support costs: Does the amount of support a customer requests scale twice as they pay twice the amount for a certain app, or no? My guess is "no".
This is why in-app purchases are so effective. Charging everyone the same price all the time doesn't make sense with digital goods
It doesn't make sense with regular goods, either. Or with anything, actually.
This seems to disagree with what I've heard of Valve and Steam sales. That the bigger the discount, the more (total) revenue is made, almost across the board.
$50 game -> 50% off, 100 sales $50 game -> 75% off, 500 sales etc
Where did you hear that from ? On the contrary. http://www.geekwire.com/2011/experiments-video-game-economic... "What we saw was that pricing was perfectly elastic. In other words, our gross revenue would remain constant."
In that interview, Gabe distinguishes between silent price changes and sales: silently changing the price had no effect on revenue, a promotion discount increased revenue.
Only in certain cases, and he mentions that they do not understand it well enough so they are still experimenting.
Yeah, but those are sales(aka short duration discounts). He noted a spike that eventually fell off. I bet the longer steam discounts see sales fall off in a similar manner.
Interesting data points, but you need more before you say "no matter what price we choose, we make the same revenue."
I agree with some of the posters who suggest splitting into 2 levels of the app at different price points. (Usually, it's better to have 3 levels, but it seems in the App Store, most companies go with 2 to make it easier on customers. I'd love to find some data with evidence that one way or another is better for the App Store.)
From a comment on the Google+ discussion came this corroboration, of sorts, from Gabe Newell.
http://www.geekwire.com/2011/experiments-video-game-economic...
Too many details to sum up nicely, but one is that when they did not advertise prices changes for CS they say almost perfect elasticity.
I guess people dont weigh in the utilitarian point of view. Why not give the joy of your app to more people. After all you are getting the same. And as some people have mentioned it might eventually be helpful.
There is no mention about competition. Most economic models assumes some kind of competition. I think he should survey the prices of similar apps and then decide where to price his app.
I wonder what happens when he sells for $0. An infinite number of buyers?
Yep, sometimes thats called piracy too, in case you're wondering...
Can't be: in his model he'd still be making positive revenue. Reminds me of the famous "Volume" line in this SNL skit (the second of the series below):
http://www.hulu.com/watch/4258/saturday-night-live-first-cit...
http://www.hulu.com/watch/4253/saturday-night-live-first-cit...
For some markets & products, that works - ok, it's not an infinite number of buyers, but the make-a-profit-at-any-price model still works out. Ex.: the Wondermark.com e-book "Machine of Death" was offered free (http://machineofdeath.net/ebook), yet fans are so impressed they demanded a paid Kindle/iBooks/etc. version, leading to a healthy profit.
In some sense it is irrelevant whether or not revenue is independent of price...if you're extrapolating from that dataset, then you really need to give yourself a few good whacks on the head with a stats text. I mean, N=2? Give me a break.
Well, you can't just go changing the price of your app every week just to see what happens. I expect they wrote the blog post to see if anyone else had observed something similar.
In his position I might stick with a higher price. I'll sell fewer units meaning there's not as many clients to support while making the same revenue.
At the lower price, you produce a lot more consumer surplus. This is valuable if you're the charitable type.
It will also lead to, if the app is a good experience for the customer of course, more word of mouth marketing which can lead to more publicity and more sales.
What is "consumer surplus"?
Let's say there was an product that you were willing to pay $10 for, but someone was selling it for only $6. By purchasing the product you get $4 worth of consumer surplus.
In general you probably get at least a bit of consumer surplus for everything you buy. The more surplus, the easier the decision to purchase (Of couse I would like to buy that brand new MacBook Pro for 10 bucks, thank you good sir!).
adding to that..
@ half the price and twice the customers you have all the customers who would have bought at the higher price "earning" whatever their surplus would have been + the (half) price - . On top of that you have all of the new customers "earning" a surplus beteen zero and the lower price.
> What is "consumer surplus"?
This reminds me of an old article written by Joel Spolsky which explains it quite well.
http://www.joelonsoftware.com/articles/CamelsandRubberDuckie...
It also goes into detail about different pricing models too which I found a good starting off point for a programmer to learn about pricing.
It's money you're leaving on the table that people would otherwise be willing to pay you.
My microeconomics professor calls it the "good deal feel". That is, the difference between what customers expected to pay and what they ended up paying (savings).
I remember an example similar to this from high school algebra-- when we had started learning about conic sections and polynomials. A barber's profit was modeled as a function of the price he charged per haircut. It turned out that the graph was an upside-down parabola. If he charged too much, no one would come and he wouldn't make any profit. If he charged too little, he wouldn't be able to cover his expenses, and he wouldn't make any profit. Our job was to find the function maximum in order to find what he should charge in order to make the most money. This article surprised me be cause it suggests the price-profit function is not only linear but horizontal over an interval. One possible explanation is that we don't have continuous data, and the actual function is some kind of complicated polynomial that has a lot of waves, which would allow a horizontal line to intersect the function at several points.