Price testing: How to design a framework to maximize your profit
Updated: Feb 5
When you look at a product, you verify the quality, brand, and price. This triplet is crucial to consumer decision making and similarly to your ROI and sales. In several instances, you want to launch a product and, thus, need to determine its ideal price. In other instances, you want to reprice an existing product to improve your lead business outcomes. This work is precisely where price testing saves the day.
A business grows when you make smart investments. Here, we are talking of capital, time as well as human resource. One such area that we will cover today is pricing testing.
Price testing: why do we require a price testing framework?
A wide array of market research goes into a product launch. One crucial step is product pricing. In other words, you are merely trying to find the most lucrative price range for the service you are offering.
Now, you will use several prices and test them across your target audience. This way, you can also perform price testing.
Now that everything around you is turning digital, this is turning digital too. Data scientists acquire data from various sources. With modern-day data analytics tools, price testing moves faster than ever.
But a critical aspect of this process is making a framework. Let us understand why. When to test a product, you target the people you think have its urgent requirement foremost. Similarly, you can use your product category, audience demographics, and several other price testing factors. The process becomes efficient, thus saves your effort, time, and capital.
What do you get out of price testing?
To broadly sum up, there are three main reasons to perform price testing:
Beat your competition: There is a high chance of finding a similar product on your competitors’ shelves. The consumer decision making funnel is highly susceptible to only two factors: product price and consumer experience. You must work on both to clear off your competitors.
Justify the service you are giving: Product price is a global representation of what a brand offers. That is why the top-brands price their products very high. Moreover, brands even have MAP compliance policies in place to safeguard their reputation. So, it is imperative that you set an optimum price that justifies what you are offering.
Earn profit: you release any product with a goal in mind. For illustration, you might want to increase your ROI or market share. So, with better products and sales, your earning is bound to increase too.
How to build a price testing framework?
Price testing gives you the desired profit only when you narrow it down to the appropriate category and customers with precision. There are several models you can follow. Let us look at the necessary steps that make up these models.
STEP 1: Determine your end goals
Generally, it is essential to know where to begin. But in business circles, it is more important to know where you want to go. Without that, you are nothing but a rudderless ship. Therefore, outline the goals you have set out for which becomes your directive principle. Common goals are:
Introduce a new category
Grow an existing category
Improving profit margin
When testing a price, keep asking questions. For example, how will a specific marginal increase in price impacts market value or sales? With these, you will be able to assess how close you are to your target.
STEP 2: Determine product category
Many of the Amazon products don’t perform at par with their potential because of improper categorization. This fact illustrates the importance of the product category.
When you kick-start the price testing, pick your product, and category with care. For instance, to test an appliance, you can use another appliance you are already testing. You have to specifically pick the product that has a shared functionality for your consumer.
STEP 3: Acquire data and kick-start price testing
Now, this is where the real work begins. The idea is to keep your goals in mind and adjust prices to see how the market responds. Look out for how the market rises or drops because these are critical points for the process.
How to collect competitive data?
Though the internet is an open source for data, much of it is the noise that is data you might find useless. So the real challenge is to get the appropriate data for your price testing.
Several price comparison websites get data directly from retailers. Furthermore, there are third-party APIs that can help you with data. In the end, web scraping in the method you get your ideal date.
Here are a few dos and don'ts for data collection:
Go by the industry: Firstly, it is important to skim through your area and know the competitive landscape. This reality check will help you brace up for what’s coming. Identify the top competitions because that is where you are going to start looking.
Study search engine traffic: A search engine is a master tool, although it is quite simple looking. The vital point to note here is that 80% of website traffic comes through a search engine. Study how a search engine performs and why it picks a particular website over others.
Study consumer behaviors: Demographics don’t offer the most reliable data. It is imperative to look at how customers behave around a specific product or offer to understand things better.
Use data analytics: With data analytics, you can quickly get information such as bounce rate, visits, or page views. But one of the cons is to get real-time data for your price testing.
Look for patterns: Understand how the market behaves to changes you make. The best way to move forward is to make incremental changes. This method will give you peaks of high performing prices.
Use the right metrics: Every goal is related to specific metrics or KPI. So, while collecting and studying these data points, keep in mind that a strategic combination of KPIs gives you the best result.
The next step is to conduct tests of varying periods. Some changes become prominent instantaneously while others take significant time. The key learnings from your data will shape your product price.
STEP 4: Perform result analysis
You can perform tests daily. Now it is time to analyze your results and determine your price. The best method to do so will be a variance analysis. You can use different metrics to see how your core goals are getting affected. Again, choosing KPIs will play an important role here.
With all this in mind, you can decide on the price of a new product. Furthermore, you can decide whether to change the price of an existing product.
The most important part of a price testing procedure is data collection. We, at Datahut, have resources to collect data from various sources. We make it a point to understand your goals because that will help us achieve the desired goals together.
Moreover, we streamline the data, pick the useful sets, and use the proper metrics to perform price testing. In the end, we help you with your business decision making. If you want to understand the might of data and see how it can benefit you too, contact Datahut.