Imagine you run a thriving online wine retail business. You wonder, however, if your prices are right. Should you raise them to bring in more revenue? Or cut them to attract more customers? To find out, you could conduct a pricing experiment to test out different price points. Learn more about how pricing experiments work and how you can use them to maximize revenue for your business.
What is a pricing experiment?
A pricing experiment is a test to determine prices that maximize revenue. Typically, it involves trial and error: You are trying to find the balance between high prices that deter customers and low prices that result in financial losses.
The premise of price experimentation is that customer behavior can change in response to price adjustments. In this respect, pricing experiments are a form of market research to find the optimal price for a product or service.
Why should you experiment with pricing?
Businesses test prices periodically as customer preferences and spending patterns change, new technologies appear, and competitors emerge. Some of the reason for pricing experiments include:
To determine price elasticity
Customer sensitivity to price changes is essential information for your business; in economic terms, this price sensitivity is called elasticity of demand. If customers react to a price increase by declining to buy or looking for an alternative product or service, their demand is elastic. On the other hand, products your customers value highly or can’t easily substitute are price-inelastic, meaning demand doesn’t fluctuate as prices change. Running pricing experiments can reveal the degree to which your product is subject to price elasticity, which can inform your pricing decisions.
To establish a pricing strategy
Pricing experiments can help determine your pricing strategy. For example, a cost-plus strategy means a business sets prices at some amount higher than production costs. By running an experiment, you can determine if this is optimal when going up against competitors. As a result, you might switch your strategy to competitive pricing by matching or undercutting your rivals.
Other pricing models include:
- Anchor pricing, which displays a reference price for a product, followed by a lower price that appears attractive by comparison
- Comparative pricing, or competitive pricing, which compares your product’s price to that of a competitor’s or a recommended retail price
- Charm pricing, which employs customer psychology to make prices look more appealing—like setting a price at $49.95 instead of $50
- Bundled pricing, which relies on selling complementary products for less than if bought separately
- Exclusive pricing, which is often used in the luxury niche to impart a sense of prestige
- Dynamic pricing, which reflects changing prices based on customer demand, such as with airline seats or hotel rooms
To set price tiers
If you use a subscription business model, pricing experiments can help you establish price tiers. This lets customers weigh price against value for each level. Software providers, streaming services, and publications typically offer tiers with progressively more content or features—for example, $19.95 for a basic package, $29.95 for standard, and $49.95 for premium.
When should you run pricing experiments?
- New product rollout
- Promotional sales and discounts
- Sales downturns
- Price increases
- Seasonal changes
Some of the following events may spur a pricing experiment:
New product rollout
Your new product may not be familiar to customers, so a price experiment can provide feedback about how much they’re willing to pay.
Promotional sales and discounts
You can determine how much of a price break you need to attract customers. Defining the time period for these sales also can help you evaluate how much the experiment affected your business’s results, and whether customer demand lasts after the promotional period.
Sales downturns
You can use pricing experiments during slow periods to see if you can revive sales. Anchor pricing, charm pricing, and bundle pricing can revive customer interest.
Price increases
If you’re considering price increases during times of inflation, an experiment can show if your customers will pay more. For example, you can raise prices in increments and measure if your sales volume falls. This also will help you test the elasticity of demand among your customers.
Seasonal changes
For seasonal businesses, price experiments probably work best before or after peak sales periods and holidays when they might be confusing to customers. The run-up to seasonal peaks is probably a better time to experiment with strategies such as anchor, charm, and bundled pricing.
How to run a pricing experiment
- Set a concrete goal
- Research your customers
- Know your metrics
- Pick an effective pricing strategy
- Run the experiment
- Assess results
- Implement price changes
Conducting a price experiment involves seven steps, before, during, and after the process:
1. Set a concrete goal
You might start with a goal of increasing sales. That’s fine, but specifying by how much and by when is preferable. So, for example, your goal could be to increase sales 25% by the end of the year.
2. Research your customers
Dig into your market’s demographics, average household income, and other factors to develop profiles or personas of your target customers. This will give you insight into their sensitivity to price changes and help you pick a pricing strategy.
3. Know your metrics
Going into the experiment, have current data on your customers’ average dollar transaction or order size, for example, or your average cost per product or service.
4. Pick an effective pricing strategy
The pricing model you choose will depend, in part, on your goals. Some strategies may be better for boosting sales volume and revenue at the expense of profit margins, such as competitive pricing, charm pricing, anchoring, and bundling. Other strategies may be more effective in getting customers to pay more.
5. Run the experiment
Make the planned changes. How long you run the experiment may depend on the size of the business, the frequency of transactions, and the amount of data you require to draw any conclusions about price and customer demand. To start, aim for at least two weeks or at least a few hundred transactions; larger businesses may want several weeks and thousands of transactions to get a clearer picture of demand.
6. Assess results
Observe your customers’ behavior. Does it change, and if so, how? Pay attention to their reaction to various price points.
7. Implement price changes
Your pricing changes depend on the experiment’s results and your strategy. You might implement a “new low prices” approach to boost sales and market share. Or, if you decide on a price increase, you could promote the value of your product to customers to justify a higher price point.
Pricing experiment FAQ
How long should pricing experiments run?
Aim for a minimum of two weeks to observe enough customer behavior to decide on optimal pricing. Big companies with extensive customer bases and transaction data may take months for price testing.
When should you run a pricing experiment?
A good time to run a pricing experiment is when your business is growing fast, when you introduce a new product, or when prices, in general, are rising.
What’s an example of a pricing experiment?
A common pricing experiment is lowering a product’s price by a minimal amount—say from $100 to $99.99—to see if that encourages more buyers while having little impact on sales revenue.
