When Was the Last Time You Tested Your Pricing Strategy?

Posted by Philip Huthwaite on December 16, 2016
Philip Huthwaite
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  1. How do you know if your pricing strategy is working? 
  2. How do you know if the prices you have set are the best prices for your goods or services? 
  3. When was the last time you made iterative changes to your pricing strategy to test if that made a difference to your overall profitability or revenues?
  4. Are you reliant on traditional pricing strategies such as cost-plus pricing?

If you’ve answered “I don’t know”, “a long time ago”, or “yes” to the above questions, it’s likely you’ve stuck with the same pricing methods for years, and now is the time to test your pricing strategy.

By not testing your pricing, you may not realise your full revenue potential. Your competitors may have gained an advantage over you by improving their own pricing. Pricing is one of the few business functions which has a direct positive impact on your company's profitability.

 

How do I go about testing my pricing? 

you need to set your business goals 

You first need to set your business goals. Are you looking to grow revenue, or are you looking to improve profits? If you’re looking to grow revenues, the key focus is going to be increasing the number of goods sold. You’re going to be much less concerned with margin.

For example, if we look at a spare parts business that is selling a heating component   for £12.99, and does a price experiment over the course of 3 weeks:

 

 

Price

Volume Sold

Total Revenue

Current

£12.99

500

£6,495

Week 1

£7.95

900

£7,155

Week 2

£14.00

420

£5,880

Week 3

£24.95

280

£6,986

 

You can see clearly from this example that £7.95 drives the most volume and subsequent revenue. Therefore, if revenue is the main goal of this spare parts business, £7.95 is likely to be a price point that they should target.

If we factor in the cost of the product which is £4.25, you can see that £24.95 is actually the most optimum price point for this business. Whilst it brought in 3.2x fewer orders, it required 3.2x less effort to bring in 1.7x more profit.

 

 

Price

Volume Sold

Total Revenue

Total Profit

Current

£12.99

500

£6,495

£3,870

Week 1

£7.95

900

£7,155

£3,330

Week 2

£14.00

420

£5,880

£4,095

Week 3

£24.95

280

£6,986

£5,796

 

It is likely that a price point between £14.00 and £24.95 will be the sweet spot, and once they have considered additional strategies such as psychological pricing, and monitored the results they will soon get to the optimum price point. Finding the right price takes patience and time, but it is worth it.

 

Determine your product and market focus

Once you have set your business goal, next up is to determine what market or what products you are going to use for your test. It is advisable to select goods and services that have a statistically represented sample sample, i.e. a larger than average volume of sales.

Once you have selected these parameters, you need a control group that is similar, where you keep the prices constant as a benchmark. Whilst these don’t have to be identical products, such as kettles vs toasters, you should try and select groups that have similar sales.

 

Test, measure, repeat

This price test should be done in small increments. It's best to test for 30-60 days in order to get results that will be significant. Simple variance analysis will give you a solid conclusion of whether you are having an impact on revenues and profits.

 

Make sure you have the right tools to support you

It can be challenging to test new pricing models. BlackCurve enables you to test new pricing models quickly and manage pricing exceptions in a way that does not interrupt your customers. The analytics platform gives you a graphical view of price change opportunities and the projected results of any pricing changes.

 

BlackCurve Free Trial

 

Conclusion

Remember, set your goals, identify your target groups, complete incremental changes, measure the results and have the right tools to support you in your price tests.

 

Sources

http://www.priceintelligently.com/blog/bid/180676/Why-You-Should-Never-A-B-Test-Your-Pricing-Strategy

http://www.marketingexperiments.com/improving-website-conversion/price-testing.html

http://blog.wiser.com/how-to-build-a-framework-for-price-testing/

Topics: Pricing Strategy, Pricing

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