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Price Testing: The Complete Guide to Price Testing Methods

By Priceva
on October 6, 2022
Prior to developing a pricing strategy, e-commerce companies need to understand customers’ expectations and define optimal price points. This is why price testing is essential both before and after product launch. This guide dwells upon different types of price testing, the ways it should be performed, recommendations for companies and ways to automate data processing.

What is Price Testing?

Price testing is the process of identifying a perfect price for a product or a service. It can give you an understanding of how much you can charge and how consumers respond to different price levels. Additionally, price testing allows measuring demand elasticity, i.e. the metric that shows how demand for a product changes in relation to price corrections.

Price Testing Methods

Price testing can be performed in a variety of ways. Let’s go over the most commonly used ones.

A/B Testing

In this sort of testing, you set two different prices to see which one delivers the best results. As a rule, you do this using one and the same product. In e-commerce, this method can be used for landing pages: you set two different prices to find out which one generates the better conversion rate.

A/B testing should not be your primary strategy because it has some drawbacks:

  • You need a lot of customers for statistical correctness and valid results. While you are testing pricing on these people, they may become averted from your product.
  • Willingness to buy a product may depend on a multitude of other factors (product description, peculiarities in webstore navigation, changes in customers’ income or the entire economy).
  • Your customers may be disappointed in your pricing policy. For example, if a person buys your product for one price, and the next day you charge a different one, it will seem like an unfair deal. Also, it might call for questions like “Do they charge different prices to different customers?” and outrage consumers.
  • Results are relative. It might turn out that neither price A nor price B are ideal for your product.

Direct pricing research

This method is based on surveys: a group of consumers is asked directly how much they are ready to pay for an item or service. Throughout the testing process, the researcher will change the price and ask respondents whether they’d make a purchase or not. The results of this testing will depend on how much value customers place on a product or service.

The major drawback of this method is that it allows defining upper and lower price limits, but fails to provide guidelines on an average acceptable price point.

Cost-plus pricing

This is a simple and straightforward method of price testing: you calculate all production expenses and add a markup to generate the price. This dollar amount is then tested to ensure that your company charges enough to generate a profit.

Van Westendorp’s price sensitivity meter

Similar to the direct pricing approach, Peter Van Westendorp’s price sensitivity meter allows identifying a range of acceptable prices for a certain product. Respondents are asked several questions:

  • What price level is too expensive to consider getting?
  • At what price would you think that the product is too cheap and you would not buy it?
  • At what price the product becomes expensive, but you would still consider getting it.
  • What price do you view as a great deal?

This approach allows dividing prices into several levels and understanding the lower threshold (the cheapest optimal cost), the upper threshold (the most expensive price people are ready to pay) and the most optimal price point.

How to Build a Price Testing Framework

  1. Now as you know different approaches to price testing, you need to figure out how to carry it out. Here are a few recommendations for building a safe and convenient testing framework:

  1. Set clear goals. What exactly are you looking to determine? The optimal price point, price thresholds, etc. This will help you choose the proper testing methods accordingly.
  2. Select the product category and items you want to test first. Performing tests on all products at once is too risky and can wreak havoc in your whole pricing strategy, so prioritize items.
  3. Select a testing method based on your goals, budget and technical capacities.
  4. Perform testing and collect data. No matter what method you select, you will need a large volume of information to validate your hypotheses.
  5. Analyze the results and compare the efficiency of your pricing strategy before and after.

This is a simplified algorithm of running a pricing test. Now we can dive deeper into the process of price comparison and calculation.

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How to Do a Pricing Test?

From all ways of price testing, A/B approach is the simplest and most affordable one. This is why the algorithm below describes this process step by step:

Choose two different products or plans within the same category

As we have already mentioned, charging two different prices for the same products is risky because it may upset customers. Instead, you can charge two similar products differently to see which price works best. This is particularly convenient in e-commerce when you offer products of various colors/flavors/capacities/etc.

Figure out the price points you want to test

How do you know which price points to test? First, you can determine the price based on operational expenses plus markup. Secondly, you should check out your competitors to see how much they charge for similar goods. When you test one product, you will figure out its price sensitivity (how demand changes after a certain price point)— this information can be used to define the cost of other items, as well.

Measure revenue to determine price

To define price points for testing, you need to calculate the levels at which you can generate enough revenue, not conversion rates. Yes, cheaper products convert better but they do not necessarily bring much profit, so you can fail to reach the desired margin even with thousands of consumers.

Re-test two new price points

If you have already tested two prices and found that one works better, you can go further and iterate this price point in the next testing round. Say, you’ve tested $70 and $100 and discovered that $70 is much more agreeable for customers. Now you can re-test pricing between $70-75, or $70-80. A new round of testing will help you find a more specific price point and generate the biggest profit possible.

Choose the price that equates to maximum revenue

Continuing the previous point, try setting the price that allows you to generate the biggest revenue. For example, if you have two prices that convert well, it would be logical to pick the higher option and increase your profit.

Other Types of Experiments

Aside from regular price testing methods mentioned above, you can try to figure out price points by non-standard methods. Here are some experimental approaches that can help.

Surveys

Surveys can be used if you are not ready to change prices in your webstore and experiment with your loyal customers. Instead of offering them an option to purchase, you can just ask them directly. Conduct a survey for your target audience, taking into account consumers’ detailed demographics. It can provide you with more precise results than A/B testing.

Monadic Price Test

This form of testing is usually performed for well-established products when you already understand their price range. This approach implies setting multiple price points for an item using a split cell test. You offer a product with a description and ask customers how likely they are to buy it for a certain price: there are several options to choose from (for example, from Very likely to Very unlikely on a scale of 1 to 7).

Then the question is repeated with another price. This lets you test several price points and get more detailed results. The collected data allows you to calculate price sensitivity and measure purchase intent with different prices.

Price Laddering

Also called ‘sequential monadic price test’, price laddering boils down to offering several price options. Respondents are shown a series of prices (typically, from highest to lowest) and asked how likely they are to make a purchase. If they choose not to buy a product, they are shown a lower price, and the process repeats until they select a price at which they are ready to buy the item.

Conjoint Analysis

In this case, respondents are offered different sets of product profiles, not prices. You show people different features for a certain price and they need to make a tradeoff by selecting the most agreeable option in terms of cost/value. Conjoint analysis is recommended before the launch of a product since it allows you to get a clear understanding of what people expect to get for a certain amount. It is also useful when you make several versions of the product— a regular and advanced one.

Common Mistakes in Price Testing

Here are a few important aspects that can affect the correctness of price testing results:

  • Different variables can affect the correctness of your results. For instance, you should not test pricing of some products while you are running a promotional campaign for products in the same category since you will not be able to define whether you owe the sales to the promo or to the price changes.
  • Measuring conversion instead of revenue is misleading because products that sell well do not necessarily generate a lot of income. Vice versa, your profit may still be high if you raise prices and sales drop.
  • Collecting not enough data can impact your results because it will not be statistically significant. You should not make final decisions until you find enough respondents for your testing.
  • Ignoring competitors is also a serious mistake because their rates can serve as reference points, which is particularly important when you launch a new product. Knowing their prices is important because it allows you to predict consumers’ reactions and build a better pricing strategy.

What to Do Next?

After finishing price testing, you need to do the most important thing — figure out the pricing strategy. And when you set prices, you need to monitor them and your competitors’ quotes, too. This analysis will help you understand whether you handled the price testing correctly.

However, manual tracking and analysis of prices is too time-consuming and inefficient when you run an e-commerce project – there are too many products to keep an eye on. This is why you should consider automation. Priceva offers a comprehensive bundle of solutions, including price tracker and price optimization software. It will analyze prices in your and competitors’ web stores and provide you with repricing recommendations based on certain formulas, price elasticity and other criteria.

The Bottom Line

Price testing is essential if you want to ensure that your products will sell successfully. Whether you perform a survey or experiment on your consumers, this is a demanding process that requires time and resources. With the help of automation tools, you can collect and process tons of pricing data much more efficiently and quickly.

FAQ

Is price testing legal?

This is an absolutely legal process unless you violate certain laws and rules, for example, MSRP or MAP policies. Generally, online sellers have a right to charge as much as they want, so you can experiment with prices on real products.

Why is price testing important?

It allows you to figure out an optimal price point at which customers will be ready to purchase your product, allowing you to generate maximum profit. Without price testing, you risk setting the price too low (which damages brand reputation) or too high (which will prevent consumers from buying your goods).

Why is a price test required for a company?

Price testing is essential when companies launch new products because they need to recoup development expenses – the chances of doing it are higher if they test prices. Besides, companies that test and adjust prices regularly exhibit higher lifetime customer value and more optimal customer acquisition cost.

How is SaaS price tested?

Similar to A/B testing, SaaS companies can offer respondents to pick an agreeable price for one and the same service. Or they can use some sort of conjoint analysis: offer several plans with a different set of features to see what customers are ready to pay for.

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