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What's a direct marketer to do when the CFO insists on raising prices to boost quarterly revenue?

Assault is frowned on in most workplaces. So the best course may be to read a recent white paper from Marketing Experiments, an online sales-research firm, on how to find the ideal price point.

The company provided several scenarios. One involved a Web-based reference book publisher. Marketing Experiments assumed that the firm's goal was to generate as much top-line revenue as possible.

The publisher's control offer was $69.95 for unlimited access to its Web site. As everything was delivered online, the publisher didn't have to deal with incremental costs like printing and shipping expenses.

As part of the test, Marketing Experiments proposed several different fees — $50; $59.95; $75; and $79.95. Web surfers landing on the publisher's home page were equally likely to see any one of these. How did it turn out?

At first glance, $75 was the optimal amount (see chart). Not so, according to Marketing Experiments.

“Though total revenue began to dip at $79.95, two data points — $75 and $79.95 — are not enough to be confident that this marks a transition to elastic demand [in which there is a clear relationship between increased price and decreased demand],” the company wrote in its review.

Marketing Experiments then anticipated additional tests at higher levels to determine where demand became “substantially elastic.” At some prices, the publisher would have seen an uptick if prospects associated the higher cost with a prestige offering, the paper noted.

Sounds simple so far? Consider a second example, in which three amounts were tested for online sales of a psychiatrist's book.

At $7.95, the doctor sold 390 copies, for a total of $3,100.50. A $14 offer generated 480 sales, or $6,720 in revenue. And at $24.95, the 300 books sold put $7,485 into the author's pocket.

Based on the logic of the first example, the highest rate appeared to be the best option — it generated both the maximum revenue and profit margin for the book. But Marketing Experiments argued that the dropoff in sales volume between $14 and $24.95 warranted a second look, especially if those extra 180 customers could be sold additional material down the road.

“The average lifetime value of your customers and your ability to make additional sales to them will be the determining factors,” the paper noted. “While for electronic and subscription-based products it may be sufficient to use total revenue [as the guiding metric], physical products generally warrant consideration of a final delivered cost and maximization of total net profit instead.”

In short, caveat calculator.

	Price Point	Subscriptions Generated	Total Revenue
Control	$69.95	183	$12,800.85
Test 1	50.00	218	$10,900.00
Test 2	59.95	196	$11,750.20
Test 3	75.00	181	$13,575.00
Test 4	79.95	162	$12,951.90
Source: Marketing Experiments

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