General knowledge tell us that price cuts and price promotions in retail products can provide a sales lift to reinvigorate products that have become stale. Successful examples of this are the recent price cut by Infinity blade which bumped the 3 year old iOS game back into the top grossing charts. I’ve read elsewhere on the internet that some mobile marketing sites are telling people to make a price cut in the 2nd or 3rd week that your app is released. But do price promotions in the AppStore actually work? And more importantly, should you do this for your own app?
Price Promotions in Traditional Retail
In traditional retail, price promotions lead to incremental volume changes in sales, which leads to the general belief that price promotions are profitable. The main concept used to measure profitability, of course, is ensuring that the additional profits earned from the spike in sales outweigh the revenue foregone from your price reduction.
How do you determine if your price promotion will be profitable? You need to know the price elasticity of your product.
Price elasticity is defined as the percentage change in volume sold divided by the percentage change in price. It is a useful metric to determine the sensitivity of price on demand.
For example, price elasticity of -2.8 means a 1% increase in price will be associated with a 2.8% decrease in sales.
Price elasticity is typically categorized as inelastic demand or elastic demand.
Inelastic demand: 1 > price elasticity > 0
Elastic demand: price elasticity < 1
If your product has a very elastic demand, revenue should increase after a price cut. If your product has very inelastic demand, revenue decreases after a price cut.
As a side note: inelastic demand is generally an indication that your product is underpriced and that you should increase it.
For example, the canonical case taught in textbooks is that cocaine has very inelastic demand, which explains why the drug is so expensive. A huge price increase will not shift demand much due to the addictive nature of the drug, so drug dealers have priced this product very high to maximize profit.
Mobile App Price Elasticity
I did a quick regression on last months sales for one of my apps, looking only at price and downloads, and saw the following:
This is a pretty small sample size and I only varied price from $1.99 to $0.99 in the past month.
Surprisingly results indicate that my price elasticity is -0.83, which means it’s inelastic and that I should not run a price promotion because I would actually lose money.
The problem with these results, besides the limited data set, is that this is an overly simplistic model. I need to add additional variables, such as:
- Store rank because an increase in downloads increases your download velocity, which affects your ranking. And there are sales benefits with increased visibility.
- Competitor pricing because competing products probably affect demand on my product.
- Getting featured because showing up on one of Apple’s lists can provide an arbitrary lift to sales without any change in price.
I have a feeling that adding these extra variables will show that the product is a lot more elastic than shown here. Unfortunately I haven’t figured a good way for me to get this data to run this test. 🙁 If anyone has good suggestions, definitely let me know.