Price testing is often neglected, but the lessons learned often lead to a dramatic impact on profitability. Given that many companies sell through the internet, we will use that model for examples of ways to test prices. However, similar types of tests can be constructed for other situations.
1. A/B Testing
A/B testing involves offering different prices that are allocated randomly to customers. From a statistical perspective, this is a very clean approach because the only thing you change is the price. An easy way to do this is to offer a variety of price points on a website using an A/B testing program like VWO or Optimizely. Companies such as Dell often use this type of price test when they release new products.
2. Offer Discounts Off a Stable List Price
By setting a relatively high list price and then showing a discount, one has the option of varying the discount and hence the end price can change without showing a frequently changing list price. This provides a flexible platform to try different prices without causing jarring changes to the overall pricing and it makes it easier to increase pricing by just reducing some or all of the discount.
3. Segment Your Customers
If a company can segment its customers into groups that are very similar, it can offer different pricing for each segment—this is a manual way of simulating A/B style testing. For example, if there was a landing page off a specific blog, those visitors could be offered a different price (although, it should be lower than list price as they might make their way to the general pricing on the website). When price testing is done based on segment, one needs to be aware that different segments could have varying levels of price sensitivity, which could cause havoc on test results if the goal is to find a general market price.
Based on my experiences with clients of Stratapult Advisors, companies can often accelerate profitable growth through new pricing models or optimized price levels. Can you think of opportunities to increase profitability of your company from testing pricing models and price points? If so, leave a comment so we can all learn.