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The guys from Site Tuners forgot about Economics

While doing my daily research about new products and services related to search engine marketing (SEM) or search engine optimization (SEO), I stumbled with a white paper from Site Tuners that is outrageously incorrect.

The product is called PriceTuning and they claim to: Establishing the profit-optimal price for a product or service. They supposedly do this by testing various price-points and getting the highest price you can charge your product or service according to the revenue per visitor, and here is the fallacy.

First of all what they are measuring is the Maximum Willingness to Pay for the customer, not the optimal price point. Why? The maximum willingness to pay is the highest price a customer agrese to pay for a product or service whereas the optimal price-point would be defined as the price that maximizes your profits of the business.

But, if I sell always at the maximum price wouldn’t I be maximizing my total profit? Well, not necessarily, and here is where the Site Tuners guys trip.

There is something in economics called price elasticity of demand that measures the nature and percentage of the relationship between changes in quantity demanded of a good and changes in its price. Uh? In simple words it measures how many units more or less are sold when a price change occurs.

I think is better if I explain it with an example, and I will use Site Tuners exhibit to illustrate it:

Site Tuners Error
This image was taken from the Whitepaper ProfitTuner from SiteTuners.com

You are selling a product and the price may range from $20 to $50, then you go to Site Tuners and they tell you the optimal price is $47 (according to their graph, because is the maximum point of the curve) and this price will give you the maximum profit from each visitor. This would be the optimal price only if your demand is perfectly inelastic. However, the optimal price should be linked to the quantity of sales you make. That is, if you charge the $47 you may have only 50 clients while you could be selling at $33 and getting 300 customers.

This analysis is done assuming there are no incremental costs if you produce more or less pieces of the product, circumstances that change the profit curve (but don’t worry, site tunes didn’t take this into account)

So, if you are using PriceTunning, review your total profits, you may be leaving money on the table, and please be careful on who you trust your pricing strategies. In addition, Site Tuners, please don’t call optimal something that is only half true, that could come back to you in the future as half number of clients maybe.