More Thoughts on Pricing a Good

10 November 2016
10 Nov 2016
4 min read

Following up from my recent article about pricing, here are a few other thought that I had regarding price and pricing various goods:

  1. Sticking with the ebook example from the initial post, let’s say that the first book in a series (book 1) is elastic 1. However, I believe that books get more inelastic the further along in the series you go. If I loved books 1-4, I’d probably pay a high amount for book 5. This implies that the pricing for a book series could increase based on how far along a reader is in that series. As an example, if I had a book series, I could charge three dollars for the first book, four dollars for the second, all the way up to twelve dollars for the fifth book in the series. 2
  2. Pricing can also be used and thought of as a marketing tool. Say you have a series of books as above. The first book as already recouped it’s costs3 but the current price is still set at three dollars. However, because the marginal costs are zero, you can now drop the price of the book for a short time (or forever) to capture new readers into the series.
  3. Price can also decrease to capture consumer surplus 4, using a tool called price discrimination. Initially, the digital good can be priced relatively high. This means that the sales are mostly made up of hardcore fans who would pay anything for the book. This also has the added benefit of keeping initial reviews of the book high, as your biggest fans can be counted on to have a mostly positive impression about your work. As sales max out at the high price point, the price can then be decreased, in order to move down the demand curve. In short, the people who are slightly more apathetic or are willing to pay less for your novel get the chance to buy the book. As the price decreases, more people will end up purchasing it, maximizing sales.
  4. Also critical is knowing your place in the genre. If all the books in the romance section are seven dollars, and I’m trying to sell a similar romance novel at fifteen dollars, I am not setting myself for success. Likewise, if you’re trying to think of something to write, it’s worth examining the other competitors in the market, to figure out if one genre is more profitable than another genre.
  5. Finally, it’s important to differentiate your good from others. A question worth asking is what makes your product defensible and different from everyone else’s. 5

These rules work for more traditional products as well. If I’m selling a set of software productivity tools, I can have an introduction tool priced lower to sucker people into the ecosystem and then have complementary tools priced higher. Same if I’m selling action figures. When selling anything it is important to scout the competition especially to find a way to differentiate your product. Pricing is a difficult and complicated topic that bears thinking about, and hopefully this article describes some of the most important factors at play.

  1. Elasticity is a well known, fundamental economic concept regarding price and the quantity of goods sold. A good is elastic if a change in price matters in determining the number of goods that are sold, relatively. For example, I raise the price of my widget by 5% and the quantity sold drops 20%. Elastic goods are often luxury goods. A good is inelastic if price doesn’t matter as much. Think gasoline or electricity. Prices could go up by 5%, but you’d still probably use the same amount of electricity. ↩︎

  2. Not to mention, sales for each book in a book series most likely resemble a funnel. I would suspect that the first book in the series sells the most units, while each subsequent book sells fewer and fewer units. However, the fans that keep buying books are the diehard fans, making the sales of the book more inelastic. Thus, you are able to make up the revenue per book by increasing the price of each book in the series. ↩︎

  3. Because you’re thinking of your digital good as a utility company, right? ↩︎

  4. Which can be defined as the maximum amount of money the consumers are willing to pay for a good. ↩︎

  5. Remember, software is a commodity ↩︎

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