There’s no golden formula when it comes to calculating the perfect price for your new product. A lot of times I have seen people pricing their products based on what they think is right, rather than finding out how their users value that product.
When I was in school, one of my friends introduced me to a tycoon game called Lemonade Tycoon and I spent hours playing it, everyday. I enjoyed it so much that I started looking for more tycoon games. Tycoon games were fun and they taught me how the real world works. How a business works. And how it’s not always a sweet ride.
Soon I came across Roller Coaster Tycoon, a game by Atari (Edit: It’s actually Chris Sawyer who made the game, which was published by Hasbro Interactive and then Atari licensed it to release more RCT games). Most of you must’ve already heard about it or played it. If not, it’s a game where you’re given a piece of land and your goal is to convert it into an amusement park earning as much profit as possible.
I wouldn’t dive much into the details of the game, but if you haven’t played it, then you need to know that a park can offer two kinds of pricing:
- Pay per ride: The entry to the park is free but guests need to pay for each ride.
- Pay per entry: You charge an entry fee but the guests can go to any number of rides for free.
I preferred to play with the former model. It was more fun to experiment with the pricing of individual rides and observe the guests’ reactions.
After spending hours on this game, I observed that no matter how experienced I got, I just couldn’t guess the right price for a ride. I always ended up increasing or reducing the price to allow me to have a balanced profit + guests influx.
What does this have to do with the real world?
A couple months back, I made an app, “Cone”, which lets you pick colors from around you using your iPhone’s camera. Cone, being my first native iOS app, took me about two month to finish. The initial version had a good balance of usability, functionality and delight (some people ignore delight in their MVPs but I believe it’s as important as the other two).
Now, I hadn’t made any paid products in the past so I didn’t have any idea on how to price Cone. There were a number of ways—make it free with ads, make it free with in-app purchases, or make it paid with a flat price.
I don’t really like when apps show me ads pasted all over their interface, so this option was instantly crossed out. I briefly considered the second option, add in-app purchases, but having recently finished with the development I didn’t want to learn yet another complex thing so I ignored this as well.
Finally I decided to price it at $0.99 without much thought and hit submit. Before submitting it to the App Store, I hadn’t asked anyone about how much they’d pay for it. As a result, I didn’t have any idea if I’d priced it too low or if people would actually pay for it.
Lessons I learnt and the impact of RCT on pricing
Cone got hunted on Product Hunt a day after I had launched it. It was purchased about 200 times and I couldn’t contain my excitement. I was so happy to see that people were actually finding it useful and paying for it.
Then, a couple weeks later, I decided to submit it to Hacker News and the response I got was overwhelming. Again, I received great feedback and about 500 sales from it. But this time, I noticed a pattern which reminded me of Roller Coaster Tycoon. People found Cone extremely useful and I saw comments like “This is really good value!”, “It’s really cheap for what it does”, “I would’ve easily paid 3x–5x of what you’re charging”.
There are 3 guests’ reactions you normally see in RCT for a ride w.r.t. pricing.
1. [Ride] is really good value
Reactions when I set the entry of the ride to $2.00
This is where you know that the price you’ve set is too low. You can increase the price and the guests will still keep paying for it.
2. [Ride] was great
Reactions when I set the entry of the ride to $8.00
This is a sweet spot (value = money). You can still experiment with the fee and increase it a bit to see if any guests are running away or not.
3. I’m not paying that much to go on [ride]
Reactions when I set the entry of the ride to $15.00
This means you’ve overpriced the ride and the guests don’t see value for money. You start reducing the price here and try to reach the sweet spot. I started seeing satisfactory results at $12.
Now, you see, it works the same in the real world. Well, in most of the cases. Once I started hearing from people that Cone is really good value, and that people are ready to pay more, I started experimenting with the pricing. I silently increased the price to $1.99 and kept promoting it like normally. To my surprise, people still believed it’s good value (!!!). Here’s the graph showing number of downloads and the price of the app.
That PetaPixel spike was probably the happiest day of my life
As you can see, the price change didn’t really affect the downloads. In turn, people were still finding it great value for money. Which means that I was still at stage 1 of reactions according to RCT, and there’s still some scope of increasing the price further to get to the sweet spot.
A couple days back (27th July, 2017 to be exact), I increased the price by a dollar, making it $2.99. And guess what? People still found it good value for money. For now, I am going to sit at this pricing and observe more reactions before experimenting further. There’s a long way to go before reaching that second stage.
Conclusion
Roller Coaster Tycoon taught me that it’s difficult to put a correct price tag on a product. You have to keep experimenting to get the price right. Start with a low price and work your way up to the point you stop acquiring new customers. Then take one step back. That’s the correct price tag for your product.
I’ll keep updating my progress with the experiment on Twitter.