Price Testing 101: How to Do it The Right Way

How do you determine the right price point for a product? It can be a tricky process. If you price your product too low, you leave money on the table. If you price it too high, you alienate your customer base and risk losing sales. You need to be able to gauge demand, discern price sensitivity, and figure out what price point actually helps you profit. The pricing strategy also differs between physical and digital goods.

 

And because price matters so much to consumers, it’s important to get it right. So how do you determine the right price that helps your business grow without losing valuable market share? That’s where price testing can help.

 

What is price testing?

Price testing is a straightforward concept: you conduct a test to determine the ideal price for a good or service. Price testing can give you insight into what you should charge consumers and can show you how actual customers respond to different pricing. It also helps you measure demand elasticity.

 

What is demand elasticity?

Demand elasticity is a measure of how product consumption changes in relation to a price change. Measuring demand elasticity helps you understand how supply and demand for a product change when its price changes.

 

Once you can measure that, you can set prices that satisfy consumer expectations and your own business goals.

 

Why should you conduct a product pricing test?

Price testing allows you to set accurate price points that maximize profit without alienating the majority of your customers. It’s especially helpful when you have to price a new product that you don’t have sales data for.

 

Generally speaking, as prices increase, demand decreases. However, that doesn’t mean you should price your product as low as possible. There’s a “sweet spot” that your product will fall into, and running pricing tests can help you define that price range.

 

the relationship between price, quantity and demand

How to conduct a price test

Before you can dial in on your pricing and conduct a price test, you’ll need to decide a few things first:

●    What are your goals? Are you trying to grow profit margins, top-line revenue, or market share for a new product?

●    What product category will you conduct the test in?

●    What product or service will you be running the test on?

 

You’ll also need to decide which product pricing test method you’ll use.

 

Price testing methods

There are a variety of testing methods you can use to conduct a price test, but here are a few of the more common methods:

  1. A/B test

In an A/B price test, you run a test with two different prices and see which drives the best results. It’s generally recommended not to run an A/B price test with the same product, because it’s unfair to offer a product to one person for less than you offer it to another. This strategy can damage your brand reputation if executed poorly. We’ll share a few tips for running successful A/B price tests in a later section.

 

  1. Cost-plus pricing

If you’d like to test pricing but aren’t sure what dollar amount to test, the cost-plus pricing method is pretty straightforward. You calculate all the costs, fixed and variable, that are incurred in the manufacturing process and then apply a markup percentage to these costs to generate the asking price. Many retailers and ecommerce companies utilize this pricing strategy to ensure they're pricing their goods at a rate that will guarantee a profit.

 

  1. Direct pricing research

The direct pricing research technique involves surveying a group of consumers and directly asking them what they’d be willing to pay for a good or service. It essentially measures the value your customer places on your product or service. The researcher will change the price throughout the course of the survey and continue asking respondents whether or not they’d purchase the product for that price. For example, if you’re developing a newline of skincare products, you might start by asking if consumers would be willing to spend $15 on a bottle of face serum, and then increase that by $5 increments until you hit a price cap.

 

How to build a price testing framework

Now that you’re familiar with the core elements of a price test, you can put together a framework that will help you plan out your own price test. Here are a sample framework for running your own price test:

  1. Set your goals. Determine what you’d like to accomplish with your price test and make sure all stakeholders are on board.
  2. Choose a product category. If you sell multiple products that fall into multiple categories, select which category you’ll test first and then select which products you’ll test within each category.
  3. Pick a testing method. How will you choose and test your new price? Refer to the methods outlined above to pick a method that works best for your goals.
  4. Collect data. Make sure you collect enough data to draw meaningful results. You’ll need a high volume of data to validate making any formal pricing decisions.
  5. Analyze your results. Is your revenue or profit increasing or decreasing since implementing a price change? What changes have you seen since the change? Compare your sales and revenue before and after implementing the change to measure and analyze your results.

 

Tips for running an A/B price test

As we mentioned above, A/B price tests are sometimes advised against because they can have a negative impact on your brand if executed poorly. However, when executed properly, they can be incredibly beneficial tools to collect valuable insights on your products and pricing.

 

Here are some tips for running an A/B price testing strategy that won’t put you at risk of frustrating your customers:

●    Test different products within the same category: As noted above, it’s unfair to ask customers to pay two different prices for the same exact product—eventually, they’ll catch on that there’s an unexplained price discrepancy. Instead, you can test two different products within the same category to see how much people are willing to spend.

Here’s an example: Let’s say you own a boutique fitness studio and you’re trying to figure out what to charge for your monthly membership. You can create three membership tiers that are priced $50-100 apart and offer extra perks as the membership price increases. In doing so, you’ll find out just how much people are willing to pay for your studio (as long as certain perks are included).

testing different products within the same category as an effective A/B testing strategy

●    Determine what price points you want to test: Even as you’re comparing two separate products, you can still adjust their prices, as long as you’re keeping the price for each product the same for every customer. That can help you find the right price range for each offering that drives maximum profit without a dramatic drop in sales.

●    Choose your winner based on revenue, not conversions: If you price an item lower and see an increase in sales, you’ll still generate less revenue than if you’d priced the product higher and maintained the same level in sales. Choose the winner of your A/B test based on overall revenue generated, not the conversion data.

 

Common mistakes in price testing

Price tests can be tricky, but these common mistakes can damage the integrity of your data collection efforts:

●    Failing to isolate variables appropriately: Make sure to isolate the variables you want to test and eliminate the risk of any other factors affecting your data. For example, don’t test pricing for new products at the same time as a major marketing campaign. You won’t be able to determine if the additional sales or revenue came from the price change or the marketing efforts.

●    Measuring conversion, not revenue: It’s worth repeating, so we’ll include it here again. Choose the winner of your A/B test based on overall revenue generated, not the conversion data. Because even if sales drop when you raise prices, your overall revenue might be higher.

●    Not collecting enough data: If you don’t have a large enough sample size or volume of data, your results won’t be statistically significant, and you probably shouldn’t make any huge decisions based on your results.  

●    Not doing competitive research: You don’t always have to start from scratch when setting new price points. What prices are your competitors offering consumers? Can you match those prices? Would your competitor steal market share away from you if you raise your prices past a certain point?

 

Successful price tests require constant iteration and consistent tracking. By experimenting regularly, you’ll be able to find the right price point for every product you offer, so you can better support your customers and meet your own business goals.

 

Don’t leave money on the table

Price tests can be tricky and time-consuming, and when it comes to pricing your products or services, it’s worth getting right the first time. The experts at Starlight Analytics specialize in direct pricing research and can help you measure your target consumer’s true willingness to pay for your product. With our proven price testing methods, you’ll gain insight into overall purchase intent, optimal price ranges, drivers of price sensitivity, and buyer demographics.

 

Contact Starlight Analytics today to learn more about our direct research methods and how we can help you find the right price for your product.

 

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