Dynamic Pricing: Let your prices rise or fall until you maximize revenue

[_david]

I think this idea has potential.<p>Most freelancers/consultants know the prevailing advice for pricing you're work is to start your hourly rate off with an educated guess, based on the minimum income you need to maintain your standard of living, and how much value you think you can provide. Then, whenever you feel like you're not getting enough work, lower your rates, and when you start getting more work than you can handle, raise your rates until you're comfortable again.<p>This way, you can utilize the constant feedback of the market to ensure you're always maximizing you're revenue, given you're current abilities, marketing, and market/economic climate.<p>Doing the same for you're web service/digital products is simple enough it could even be automated. What do you think, would you price your services this way?

[chaosmachine]

"Apparently, the rule of thumb for online sales is that 5% of your online visitors can be turned over if you have a really sweet offer. Given that we have roughly 5,000 visitors on our site per day, and we put the sales button on every page, the maximum we’d sell is 250 packages a day."

I think they're in for a shock. 5% sales conversion on random traffic to your blog? That's probably off by an order of magnitude. Random visitors aren't in shopping mode. Ask anyone who's ever got a bunch of traffic from Digg or Reddit.

You're lucky if 5% click the link to go to your sales page.

[flooha]

No doubt. I've heard the 1% rule, which mirrors my own experience, but I've never heard the "5% rule of thumb". Also, what defines a "really sweet offer"?

[RiderOfGiraffes]

Related: http://news.ycombinator.com/item?id=488663

If you do use dynamic pricing and you measure things carefully you can compute/deduce the price-demand function. It's not a straight line, as most people would intuit and that article assumes for simplicity, but the analysis in that article can be applied to non-linear systems. Dynamic pricing allows you to start that analysis.

[megaduck]

A word of caution: a potential problem with this strategy is that pricing sends a signal to potential buyers. Higher price generally implies higher value.

If you switch to fully dynamic pricing, then you lose control of the marketing message that's encoded in your prices.

You also risk irritating people who feel 'gamed', but that's probably not as big of a worry. People have been complaining about airline dynamic pricing since forever, but it hasn't seemed to stop people from flying.

[david]

Maybe if you were running a service, you'd be better off evaluating how well your prices are doing by selling multiple plans and paying attention to their relative sales behind the scenes. If only your cheapest plan is selling, you're probably priced to high, and if your cheapest plan is ignored, you might be priced to low.

I don't know if the higher price sending a signal is all that relevant, since you would basically just be changing the price in whatever direction will maximize revenue. If the high-value signals end up producing more or less sales, you would just see that in the results.

You would definitely mix up the whole perception of your prices though.

[shib71]

I suppose the assumptin of the article is that you're selling a something that could be considered a commodity.

[dejan]

I've written an article before on this topic: http://aleveo.com/ideas/real-time-variable-pricing-for-the-w...

Surely I think it is a good step forward, but there are two sides of the equation, maximizing profits and providing fair value for the price.

If the company wants to maximize profits they might just as well start with highest possible price as tybris suggested. However, price has always been related to scarcity, and if there is no control of the same, the offer gets commoditized , hence the real and perceived value is not appropriate. The book Experience Economy talks a lot about this.

EDIT: In any case, the one that is concerned with fair value has a sustainable advantage over the one that is looking for ripping off customers. Dynamic pricing should involve many variables, such as time since marketed, total sales, stock, discounting, revisions etc, but I would keep all of this information out of the sight of customers as it may appear very confusing and irritating for the conservative ones.

I am not sure whether they are doing it right here, but I have great respect for experimenting. Behind every great invention there is an exploded lab :D

[quellhorst]

Google uses dynamic pricing with AdWords to make billions of dollars.

[xiaoma]

There's still the possibility of getting stuck at a local maxima.

[simurai]

On the iPhone app store you see constantly dynamic prices.

Most apps start with an introductory price to boost their ranking. Then it goes up to normal and if they see that it doesn't sell anymore, they lower the price again. Or they do weekend/Holliday sales too.

I think for a user it's not just the fact to save a buck or two, it's more the satisfaction you get when you feel you got a good deal.

[messel]

I like the idea, but I suggest publicizing and making transparent the model. Let potential buyers know that price s will be going up and they may buy in sooner. Or let them know it's going down, they'll wait, and then pounce on your product at the bottom driving it back up.

Fun read, although I wasn't excited by the template. I prefer messy with more information.

[david]

I think that's the biggest challenge with this approach: figuring out how users will react to the price changes. Someone who goes to a site and sees an ebook listed for $8.95 is going to perceive that price a lot differently than someone who sees an ebook for $8.95 and knows that it's been going up from $5.25 for the past couple weeks.

I've actually been a fan of IA's template for a while, even though they keep updating it. It's one of the best examples I know of a well-executed minimalist design, the overall grid layout, and the attention to detail makes everything work.

[tybris]

Bad idea, you will influence you revenue (negatively) by doing so. Just start high and slide down. Or start low and add "premium" services.