A Step by Step Guide to Price Testing Frameworks
An effective price testing framework helps brands and retailers try out prices that are in-line with their brand image in order to find the optimal price. This is especially useful when introducing a new product to your market, but even when rethinking how to revitalize an older section of your assortment, the most effective pricing will help optimize sales and profits.
As with any scientific study, there are specific steps you’ll need to follow in order to gain the results you’re after. Let’s go through them in detail.
1. What Are You Testing and How Does it Fit in with Your Company’s Goals?
The specific products you test need to have a adequate amount of sales each day in order to collect enough data to make a conclusive pricing decision. If your goal is to find a price that will maximize revenue, you will need to determine which price helps increase sales volume significantly. On the other hand, if profit maximization is your aim, you’ll need to see how high your price can go before demand starts dropping off. The price you charge for the item will have a direct impact on your bottom line, so staying clear about what your company wide goals are will help you test pricing in the correct way.
2. What Do You Think Will Happen and Why?
If you have decided to put a price testing framework into place, you might already have an idea of what you could find. Your hunch is what you can put on the line to test and get it backed up or with statistically significant data or maybe it will turn out that you were completely wrong. Regardless, you’ll need to set goals and a hypothesis. What do you think will happen when you increase or decrease the price? Document your reasoning behind your hypothesis and keep it in the back of your mind as you start to test different prices.
3. How Far Can You Deviate from the Original Price, While Still Maintaining Your Brand Image?
This is one the most important steps of the price testing framework because it determines the boundaries within which your experiment can occur. You might want to lower and raise your price by $1, but if you’re testing a low cost item, you might receive some backlash from customers. Therefore, you need to test prices in a way that makes sense relative to the original prices of the item, so that your price changes aren’t too drastic or out of the ordinary based on your brand positioning.
Beyond that, considering the elasticity of prices is also crucial. Some products are not good candidates for price tests, so you must know the difference between the two.
4. How Long Will You Monitor the Impact of Price Changes?
The length of your price test is largely an individual decision, but the more data points you can gather, the more conclusive you can be. Whether it’s a few weeks or a few months, talk to your team internally to understand how soon you need to decide on a price from your findings and define what qualifies as a statistically significant result.
5. How Will You Measure Results?
What constitutes success for you? Do you need to see a 10% increase in demand before you decide on the best discount for a product? Success in retail is a mix of external and internal factors, so dig into the data to know what price has worked best over time and test against that price to improve upon it.
Externally, it is worthwhile to monitor competitor pricing data. Gain a deep understanding of their pricing on the items you’re testing over time. If you’re trying to go head-to-head with them, maybe test the prices they most commonly offer those items for to see if they produce the results you’re in search of. Even if you don’t want to test their exact prices, being aware is a good way to know how your prices have stacked up historically and what prices consumers have grown used to over the years.
6. When Will You Test Again?
Pricing optimization is an on-going process. A price that helps you exceed your revenue goals today might not be the correct price next month. Be aware that pricing isn’t stagnant because consumer preferences and the market in general change rapidly. While you can guess how your competitors might do to try to steal business from you, you can never make a perfect prediction. That’s why preparation is key. Being able to respond to price changes in real time keeps you limber enough to win the race for market share.
Contributing Writer: Angelica Valentine
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