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Price testing can be tricky particularly if you have an established company. This topic has brought much debate amongst marketing professionals over the years as well. Today we are going to share our thoughts on price testing and some techniques on how to do it.
What are the best price testing options?
AG Lafley, CEO of Procter & Gamble, in his book Playing To Win stated that there are really only two ways to win, “You can either beat them on price or you can beat them on value.”
What he was referring to is that you can be the cheapest in the market or you can provide so much value in your product that the price doesn’t matter.
This philosophy is true for pretty much any industry. You could have two almost identical pieces of software that accomplish pretty much the same end result. One could be priced at $100 per month while the other could be many thousands of dollars per year. Target market matters and so does the perceived value.
There are even cases where your market might be extremely price-sensitive. A few cents or a couple of dollars could make or break sales conversions.
One example of this was a client campaign we were working on. They had a product priced at just $12. In an effort to squeeze out a little more profit on a product that had pretty tight margins we tested simply add $1 to the price making $12.99. This slight change resulted in a dramatic reduction in conversion rates. Kind of hard to believe that just $1 could make such a difference. We knew they were price sensitive based on the market research but didn’t think it was quite that bad.
Some companies might be hesitant to do any kind of price testing in fear of negative backlash from former or future customers. If this is you, understand that it is wildly common to offer discounts on occasion. Consumers love getting deals and a vast majority of companies out there offer discounts.
Again it is all about perceived value.
If you are hesitant with trying any kind of price testing here are a few tips to make sure you get the most out of your efforts and mitigate any negatives.
1. Test on a small % of traffic
If you have quite a bit of traffic to your site and offers it may be risky to do price testing on all of your traffic. Instead, run your price testing on a small percentage of your traffic. Our testing tool of choice, Optimizely, allows us to set a percentage of traffic that we want to see the variations. Which basically means we can choose a random sample size.
This allows us to get feedback on whether it is a viable pricing option or not before rolling it out to a larger audience. If for some reason, like in our example above, the test proves to have a big downside we have reduced the negative impact.
2. Test big changes
In many industries especially when competitors have pricing that is across the board, price testing big changes can be the best option. Basically it means test $50 and $150 instead of testing $50, $55, $60 at least to start.
This technique allows you to find out what the market can handle and the maximum your audience will pay for your particular product and offer.
Once you have established a “base” then you can test slight changes to dial in the conversions and customer value.
3. Conversion rate isn’t the most important metric
I know we mostly talk about increasing conversion rates, but in price testing conversion rate is actually not the most important metric to watch.
There are cases where improving your conversion rate could actually make you less money. This is particularly true when price testing especially if you have upsells, cross sells, and downsells.
For example, say you are selling a product for $50. You decide to test the price at $40. As a result of the price drop, you see a nice bump in conversions. Woohoo! more customers! This may be good but with the price change, you now have fewer people purchasing your upsells which brings down the customer value, making you less money. You get more customers and have a better conversion rate but you make less money. Not good!
When price testing, make sure you are paying attention to your average order value and your customer value. This is most important if you are testing a price reduction (it may be better to test higher prices).
There you have it, some thoughts on price testing and some ways to go about it.
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Want to get our thoughts on a particular pricing scenario? Reach out for your no-obligation one-on-one personalized acceleration session.