A Beginning Entrepreneur’s Guide To Pricing, Part 2: How Price Conveys Value

When I previously wrote about how to price professional services, I noted that my strategy is to price toward the higher end of the market.

That is, my rates tend to be higher than most, because I believe that price conveys value. People instinctively assume the price of something directly correlates to its quality — that which costs more is better, that which costs less is worse — even though, in the information economy, price and quality are inversely related (i.e., Moore’s Law).

What my pricing strategy really does is quickly dismiss price-sensitive customers and weed out those who are unlikely to become repeat customers. As a rule, that’s fine by me. I occasionally do very small projects for one-time customers, but those are either favors for other clients or done to leverage the goodwill of someone who can help me hire bigger, repeat customers.

This seems counter-intuitive to most beginning entrepreneurs, who tend to think all paying work is good work; that is, if you have to bid low to get work, at least you got the work.

But I recently ran across a fascinating item on FingerGaming.com (via slashdot) about a developer’s experiences selling games on Apple’s App Store.

As a lark meant to discredit the iPhone / iPod Touch as a gaming platform, Tommy Refenes and Adam Saltsman created Zits & Giggles, the object of which is to pop zits.

“Like so many other iPhone games, Zits & Giggles launched at $0.99. Sales were never remarkable, and they eventually tapered off entirely.” the entry notes. “But rather than pursue a traditional marketing strategy like offering the game for free for a limited time, Refenes did just the opposite: he raised the price to $15, exorbitant by iPhone standards.”

One might think this would lead to a significant drop in sales, which it probably did. But three people paid $15 for it the day he jacked up the price.

Refenes increased the price to $50; four more people bought it. He decided to keep increasing the price after every new purchase; 14 people bought it for $299, and the game went all the way up to $400 before Apple removed it without explanation (probably, they didn’t like having the App Store used for social engineering).

As the FingerGaming.com blog post notes, the higher price points generated more than $4,400 for what had previously sold for $1. In other words, he had to sell over 4,400 units to make the same amount of money for selling 11 units.

Gaming The Ratings System

Refenes takes as lesson that App Store buyers “are not necessarily gamers.” But they did play his pricing game as we would expect.

First, he sold many copies of the game at a low price. This created enough ratings and feedback to give the game a positive reputation. In other words, he built a social network of people with a positive attitude about his business by selling a silly game for a low price.

With that in hand, when he raised his price, two things happened.

First, it created a sense of value in the minds of potential buyers; again, people automatically assume expensive things are worth more.

Second, there was social proof behind that assumption in the form of lots of positive reviews. Since there is no clear indication within the App Store at what price a person offering a review purchased the game, it appears to someone new that all those reviewers paid the current asking price. In other words, you got 100 reviews from a game people bought at 99 cents, but the guy buying it at $100 assumes that’s what everyone else paid, too.

Value Assessments Aren’t Fixed In Stone

In other words, price resistance is based on a value assessment, and value assessments are based, in significant part, on reputation.If your reputation is strong enough, you can charge more.

One could reasonably argue that Refenes was effectively tricking later buyers, since most of his reviews were made by people who paid far less, and who probably wouldn’t have considered the game worth the higher amounts being charged later. I would agree in principle that the game really being played was against a built-in deficiency of the App Store’s rating system.

But the overriding point remains valid: If you build a social network that supports a positive opinion of you and your works, you can price your services higher than others. You will do less work, but you will also need to do less work, because fewer well-paying jobs are better than lots of low-paying ones.

And again, a customer who cares more about value (that is, getting better than he bargained for) than price (that is, how much he paid) is a great customer.

All links in this post, on delicious: http://delicious.com/dougvdotcom/a-beginning-entrepreneurs-guide-to-pricing-part-2-how-price-conveys-value

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