Cheap at Twice the Price: Can Raising Prices Really Bring in More Business?

John Tabita

Last week, I explored the idea that raising prices can actually increase business. To many business owners, this is counter-intuitive. Most believe higher prices means less people will do business with them. But is that really the case? Some people have too much business because they charge too little. Others don’t have enough for the exact same reason. Case in point:

Cheap at Twice the Price

There was a shop in New Mexico that catered to tourists. The owner had acquired a number of Native American jewelry pieces, but she was having trouble selling them. Busloads of tourists would come through her store, look at the pieces, and leave without buying. She tried lowering the price, but to no avail.

As a last resort, she decided to offer the entire line at 50 percent off. After scribbling a note for her store manager to do so, she left for a week’s vacation.

Upon her return, she was pleased to discover that all the jewelry had sold. But further investigation revealed something startling. Her manager had misinterpreted the scribbled note to mean she should double the price of the jewelry, and that’s exactly what she did.

The preceding is a true story (I just can’t recall who I heard it from). This isn’t an isolated incident. Here’s the story of a software developer who had the same experience with his product, a consumer-focused productivity application, which he offered for $9.99.

Upon launching the software, Gary emailed every technology blog and journalist he knew to find some media attention for his product, and it worked: a number of major technology blogs covered the launch, and web traffic peaked at 50,000 daily hits over the launch period. Unfortunately, while traffic to the website was great, sales figures were very low: a huge volume of customers were viewing the website and deciding not to purchase the product. In an attempt to resolve this, Gary spent weeks tweaking and then fully re-designing the website, but it had no effect: people simply weren’t buying the product.

By March 2011, Gary became desperate, and out of a desire to begin making some kind of real revenue from the product, he decided to double the price of the software to $19.99, hoping to sell to the same niche of particularly interested customers who were currently purchasing the product, but at this higher price. To his shock, sales of XProductivity immediately spiked, increasing to ten times the number of daily sales he was previously processing.

So is there a corollary that says raising prices automatically results in more business? If it were that simple, we could all charge exorbitant rates and rake in the cash. It’s not quite that simple. Still, the bottom line is that many customers still equate cost with quality.

Yet, a 2009 Cornell study showed that, in two food-related experiments, higher prices didn’t cause the expected higher demand, contradicting previous studies [pdf].

What do you think? Were my two examples anecdotal, merely exceptions to the rule? Or does it depend on the product being sold?

One final thought. Even if raising your prices does cause less people to do business with you, it’s possible that the higher price will compensate for the decreased demand. In other words, selling fewer items at a higher cost may bring in more revenue and profit than your lower price structure did … and with less work on your part, to boot!

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  • Anonymous

    Games Workshop certainly apply the “put the price up and hope that enough buyers still pay for you to turn a profit” model.

  • http://profiles.yahoo.com/u/HBBLC7GHUMJHFMFZ2F5HSAZQZ4 AaronL

    The first example appears to be one in which the pricing change shifted the perceived value of the item from commodity to luxury. A higher price shifted the perception of those customers most likely to make a purchase from, “It’s nice, but I only wear fine jewelry,” to “Fine jewelry”.

    In terms of the software example, I expect that there is another factor involved – good buzz, good reviews, etc.

    For services, sometimes raising prices can create an effect similar to those of luxury goods – effectively making the expense something to brag about (or that you’re psychologically inclined to defend). A lawyer I know claimed that his clients complained less once he raised his fees, with his perception being that they both assumed that “any lawyer who costs that much has to be good,” and their being inclined to defend the payment as “expensive but worth it,” while at a lower price point he was too easily compared to other lawyers who might charge a bit less. Post-price increase, the thought process seemed more along the lines of, “If you can’t afford my lawyer, I suppose they’ll do.”

  • Hamish Durkin

    I remember a situation where I wanted to get rid of some garden pots, so I put them outside my house with a ‘free’ sign and they sat there for a week. Then I changed the sign to $10 each and they were stolen that night

  • http://twitter.com/camposgalan Omar Campos

    Could this apply to the U.S.A. only? I rember a similar annecdote where selling wine at a higher price (in California) increased the sales of those wines.
    In the UK it seems, to me at least, this is not the case; and I’m not only refering to the wine.
    I’ve heard a lot of people “not” buying an iPhone app because it costs “more than a [sterling] pound”.
    Still, very interesting article. Definitively food for thought.

    • http://www.facebook.com/onsman Ricky Onsman

      I don’t think it’s USA-only, Omar. Australia perversely prides itself on the tall poppy syndrome whereby anyone deemed to have tickets on themselves has to be brought down to earth, yet when an early mentor instructed me to double my prices, it turned out to be the difference between scratching a living and building a real career platform. Setting myself as a premium provider definitely helped me land my first really big contract, and that set me up.

      It does, however, carry risks. You have to live up to the fee. If you charge premium and don’t deliver – or are not perceived to deliver – you won’t last long. If you do deliver, you win new premium business as well as retain your satisfied premium clients.

      • http://twitter.com/Tahutis Pete Wright

        It isn’t USA-only, and yes, it depends on the product – sure I’ve seen research categorising goods & services by their response to price increases in this way, but can’t recall where, sorry. Still, I can say that here in the UK, increasing my own prices by 25% definitely increased the amount – and quality – of work coming in.

  • http://twitter.com/webmage Leyla M

    Same thing as eBay vs. Amazon: In the eyes of consumers, dirt cheap = expect bad quality, too expensive = not worthwhile, something in the middle = trustworthy & what they’re looking for.

  • http://www.insurancegofer.com igofer

    People actually tend to buy things more when they are more expensive, but not too expensive