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Tad Carlucci · (This post was last modified: 04-11-2012 06:42 AM by Tad Carlucci.)

Two rules:

1) if it sold, the price was too low. The quicker it sells, the too-lower the price.

2) if it did not sell, the price was too high. The slower it sells, the too-higher the price.

Somewhere between those two extremes is where you want to be. There are note cards I've seen which help pin the tail on the donkey for starting points. But they're guesses .. educated guesses, but guesses nonetheless.

War story: decades ago I wrote a set of programs for this new-fangled computer called the IBM PC running a bare-bones operating system called MS-DOS. My partner and I decided to see if we could sell 'em. They weren't much and so we put 'em out for "free, pay $2 for shipping and handling." We sold a bunch. So my partner tried to maximize profit and tried "free, pay $5 for shipping" .. no sales to speak of. After a few more goes at it I was able to determine that "free, pay $3" was the correct price. Sales were actually higher than at the $2 price! What was happening? Well, at the $2 price we were losing sales because people worried that low price indicated the software was even that good. At the $5 price they worried that it was not good enough. The $3 price was very close to the balance point where risk and perceived value met so both sales and profit maximized. This worked fine for a few months. Then someone else came out with more/better programs doing the same thing. One would expect we'd have to lower our prices to stay competitive. Actually, after more testing, we found we had to RAISE them to $10 and, as that silly, cheap computer became more and more popular, we had to KEEP RAISING them! That lasted until that simple, bare-bones operating system was replaced and our programs were no longer needed.

Moral of the story: If you're there first, you're creating the market. Competition can actually make the market larger, making your job easier. But every gravy train eventually ends. At some point either the market saturates, or conditions change, and it's time to move on.