Maximize Revenue 101: Should You Lower or Increase the Product Price to Increase Revenue?

If you sell products from your website then you probably ask yourself this question a lot. Few of my users have asked the following question in slightly different shape or form many times, so I decided to share some of my own experiences and results from my own tests which might help some of you:

I want to increase my revenue and obviously getting more traffic to the site would help but I have been wondering if I can tweak my product prices to help with this in the short term?

There is no way to know for sure unless you perform some testing yourself because your situation is most likely a lot different than mine. In this article I will share some test methods, basic theories, my test results and things to keep in mind to help you find the answer to your question.

1. Basic Theory

We can express the total revenue using the following simple formula:

Revenue = Conversion * Price
Simple Example: If your product is priced at $47 and if you have 10 sales everyday then your revenue per day would be $470. So every month you would make about 14k.

Aim: your aim is to tweak the “PRICE” variable in the above equation so it yields more than $470 per day.

The above equation sounds simple enough but the KEY is actually to find out the relationship between the “price” and the “conversion” variables for the product in question. In other words, we need to find out how the conversion number changes as you change the price variable.

The relationship between the price and the conversion variables can be expressed with the following formula:

Conversion = K/Price
Basically, conversion number is inversely proportional to your price amount. K is the unknown constant that we need to find out via testing to solve this whole equation. Finally those math lessons are coming in handy  . Lets refer to K as the “conversion constant”.

According to the above formula, as your price amount increases your conversion number will drop and vice version (you probably didn’t need a formula to understand that but it helps when you are trying to prove something mathematically).

2. Test Method

You want to find out how your conversion constant changes as you change the price of the product. This will help you find that sweet spot where it yields the maximum positive  result.

The best way to find out how your conversion constant reacts to the price change is to setup a split test (A/B Testing) with your sales page. So you are going to have two copies of your sales page with two different prices for the product (for example: sales page A will offer the product for $47 and sales page B will offer the product for $97). You then serve “sales page A” to 50% of your customers and serve “sales page B” to the other 50% of your customers (preferably randomly). Once you have enough data, you can then setup another split testing scenario with another two price points and gather more data.

This will help you measure the conversion constant for different price points. When you plug these numbers in the formula mentioned above it will help you find out the sweet spot.

3. My Test Results

Time for some live test data from the tests that I performed on one of my product selling sites (these numbers are not from Tips and Tricks HQ products)

Test Result 1:

When I halved the price of the product the conversion constant went up by 2.8 times.

So if I was selling the product at $50 and I sold 5 copies everyday, the number went up by 2.8 times to 14 copies per day when the price went down to $25.

• Total revenue @$50 = $250 ($50*5) = About 7.5k per month
• Total revenue @$25 = $350 ($25*14) = About 10.5k per month

Test Result 2:

When I lowered the price by 25% the conversion constant was still holding over 2 (2.2 to be exact).

So if I was selling the product at $50 and I sold 5 copies everyday, the number went up by 2.2 times to 11 copies per day when the price went down to $37.5.

• Total revenue @$50 = $250 ($50*5) = About 7.5k per month
• Total revenue @$37.5 = $412 ($37.5*11) = About 12.5k per month

Test Result 3:

When I increased the price to double; the conversion constant went down to .25

So when I bumped the price to $100 it was only selling about 1 copy per day:

• Total revenue @$50 = $250 ($50*5) = About 7.5k per month
• Total revenue @$100 = $100 ($100*1) = About 3k per month

You probably know by now which option I decided to go with 

4. Things to keep in mind

• Remember that you are not focusing on the “Number of sales”, you are more interested in the total revenue. So for example: lowering the prices will most likely increase your number of sales but the question to ask yourself is, “Does it actually result in a total revenue increase?”
• Don’t come to a conclusion that lowering the product price will always yield more revenue. Do your own testing and you might find out that increasing the product price actually gives you more revenue given your situation.
• Treat each product uniquely. Just because one method works for a particular product does not mean that the same will work on all of your products.
• You can also use these numbers to figure out how much discount you want to offer when you run special deals for your products.

I hope this article has given you some ammunition to run your own tests and find out which price point works best for your product. Please share your theories and findings in the comment area below.