The pricing of your product or service can present somewhat of a challenge. Price your product too high and you risk alienating the majority of your potential customers. Price it too low and you could end up not bringing in enough revenue to sustain your business.
So how do you find a balance?
That’s what we’re going to discuss and show you how in the below blog post.
Why it’s important to price your product correctly
Pricing your product or service is one of the most important things you can do for your business. This is because your price determines how consumers position you in the marketplace, which is either as a high-quality, value-based brand or as a convenient and cheap alternative.
Factors to consider when choosing pricing
When settling on an ideal price, there are a few factors to consider. For example, what competitors may be charging (competition-based pricing) and how much profit you’d like to make (cost-plus pricing). Using a combination of these pricing structures will help to inform your unique pricing strategy.
To learn more about the different kinds of pricing strategies, take a look at this article from Zapier.
Once you’ve done all your research and chosen the pricing strategy that works best for your business, you might still be unsure of the exact amount to charge. For example, if your pricing strategy shows that you should be charging within the range of R5000-R6000 for your product or service, you might still need to find that sweet spot within that given range.
If you charge R5000 for your product or service you might miss out on the revenue that you could’ve received if you charged R6000. And if you charge R6000, you might limit the number of consumers willing to purchase your product or service, which could potentially decrease your revenue overall.
This is where price testing is super helpful!
What is price testing?
Price testing is when you test your prices to get an idea of the ideal price for attracting prospects and customers while still being able to make a profit. One common type of testing is A/B testing. A/B testing, also known as split testing, is when you test different prices, specific to one product to determine which price has the most impact in terms of sales and business metrics.
Another common type is geographical pricing which tests prices for the same product in different regions.
How to A/B test your pricing
Before we dive in, it’s important to note that in order to meet the criteria for A/B testing, you need a minimum number of people to purchase your product or service at both price points for your test to be statistically significant.
It can be difficult to achieve statistically significant results, especially with businesses that work with larger clients and those that offer more complex deals. They typically find it difficult to attract enough people to ensure that the results are useful.
That aside, here are the 5 steps on how to get started A/B testing your pricing.
1. Pick two different products or services that fall within the same category
Picking two different products or services ensures that you are being ethical and fair with your prospects, you don’t want to test two different prices on the same product at the same time. This could cause customers to be upset and in turn, damage your brand’s reputation.
That being said, you could choose to sell the same product at a set price, for example, R2500 for three months and then wait another three months to increase it, see how many people buy and then compare the results.
But for the example’s sake, let’s apply the first approach and say that you sell social media scheduling software. In order to A/B test, you could start off by choosing a basic plan and charge people R2500 a month. Within this plan, customers would receive up to 5 social media accounts and 2 users. Then you could choose a professional plan and charge customers R6500 a month, which would include 10 social accounts and 4 users.
By offering this, you’d be able to test how much people would be willing to pay for a social media management tool and test at what point it would be too much. The professional plan would offer double the value of the basic plan but would charge more than double each month (R6500 per month for 10 accounts and 4 users can be broken down into R3250 for 5 accounts and 2 users) whereas the basic plan would only be R2500 for 5 accounts and 2 users.
Once enough people bought from both plans, you’d want to track if the conversion rates were higher or equal on both the basic and professional plans. If there seemed to be a drop-off in buyers for the professional plan, you might want to lower your rate on that product to see if it would positively affect revenue.
2. Set the price points that you wish to test at
Determine the prices you want to test at based on competitor pricing and operational costs. The point here is to gauge price sensitivity or measure the degree to which demand for your product or service changes after a certain price point. For example, you may find that if you price your product or service at R10,000 the amount of consumers willing to buy decreases dramatically. The goal is to choose realistic price points in order to figure out the highest price you can charge while still maintaining the highest amount of potential customers.
3. Measure your revenue to determine your prices
When testing, be sure to measure your revenue and not your conversions, in order to see which price does the best on your A/B test. You’ll likely find that you have much higher conversion rates on your lower-priced products versus your higher-priced ones, but that isn’t necessarily an indication that you’ve achieved your revenue goals.
4. If need be, re-test new price points
If you tested R6000 a month against R9000 a month and found that R6000 a month gets you the most conversions and possible revenue, consider re-testing between R6000 and R7000 or even R6000 and R6500. In this way, you’ll refine your results and identify a highly specific price point that will provide you with the maximum revenue possible while still providing the best value for your clients.
5. Settle on a price point that maximises revenue and provides the best value
Finally, choose a price point that suggests the maximum revenue by determining the highest price that customers would be willing to pay in order to meet your business goals. Don’t forget to factor in the value that this product or service offers to customers, as it is important to not only focus on revenue but the value that you offer to clients.
Conclusion
If you are interested in using price testing, and A/B testing in particular, to determine the best price for your product or service, we’d suggest using the above process along with some other techniques. For example, testing the design of your pricing pages or product landing pages. You may find that by altering the way you display your product or service on a page, you’ll increase the amount consumers are willing to pay.
