Practical Price Testing
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The document discusses various aspects of price testing, emphasizing its importance in marketing and business strategy. It covers testing techniques, impacts on customer behavior and brand perception, and offers guidelines for successful implementation. Additionally, it highlights the significance of consistent messaging, discount strategies, and the broader effects of pricing on revenue and loyalty.
Practical Price Testing
- 2. Pricing Challenge in Summary Nichols & May “$65 funeral”
- 3. About Me I have run over 500 marketing experiments Many of the most successful tests have been related to pricing & packaging I teach a/b testing courses around topics such as statistics and design of experiments Have run experiments for...
- 4. Intro Price testing isn’t just the price. It encompasses: Price levels Price gaps Price anchors Discount strategy Line up strategy Feature composition Cannibalization Pricing by Marketing Channel Pricing by Customer Segment Pricing by Vertical and more
- 5. Broader Impact Pricing decisions don’t just impact immediate conversion. It also impacts... customer satisfaction and loyalty ability to sell other things in the short-term refund rates future revenue stream possibilities brand perception customer expectations
- 6. Can you? Should you? There’s some debate around the legitimacy of price testing against live customers. It is done all the time. Be careful not to discriminate. Randomization is not discrimination. Be careful around consistency of experience Test targeting can be tricky in particular for logged-out experiences Test quickly and have a back-pocket offer.
- 7. Toolset Tougher to do with off-the-shelf testing tools Often requires building own testing and reporting capabilities
- 8. Goals As with any experiment, what are the key success metrics? Just because it’s a “price test” doesn’t mean everyone is necessarily on the same page at the start. KPI options Top line revenue Price charged at checkout Bottom line profit short-term Bottom line profit long-term New customers NPS / WTR / WOM etc. etc.
- 9. Effort vs Reward Price testing is at the harder end of the optimization spectrum The payoff is well worth the investment however I have seen > 40% lifts from price testing Price testing has the broadest impact: not a page or segment usually but an overlay on top of the whole business – huge leverage
- 10. Lab vs Live Ideal is to start testing in the lab (surveys, focus groups, conjoints, etc.) Once you have pretty good confidence in certain directions, then move it to live tests Does not have to be done in that order however.
- 11. Controlling Variables Simplest approach is to test in phases: Packages (e.g., components of the offer) Lineup (e.g., how many packages there are) Messaging (e.g., how to sell each package) Prices for Core Offering (the actual price levels) Price levels for Add-On Offerings Timing or Sequence of Sales Cycle Discounts Be sure that you are either testing just one of these factors at a time, or else establish an appropriate experimental design to tease out the effects of the different factors.
- 12. Continuous vs Discrete Variables Price is continuous, can test more points on the curve without additional sampling overhead Number of packages is not quite continuous 1 means no choice Odd numbers are best Limited to single digits
- 13. When to Price Test You have new products Your products have changed Your competition has changed their pricing You’re at a new part of the market adoption curve You changed strategic directions
- 14. Subscriptions SaaS? Have to use cohorts Trial period? Have to track free to paid Monthly subscription? Get a few points on the curve and estimate Annual subscription? Harder to estimate
- 15. Choosing Your Customers In some cases, the prices you choose determines the kinds of customers you’ll get. The are downstream implications of acquiring different types of customers. Lower list prices or frequently discounted prices bring in more more conscious customers. The may be: less loyal less likely to buy future offerings more likely to cancel more likely to use customer support
- 16. Discounting You should study the frequency of discounts steepness of discounts duration of discounted period predictability of discounts impact on brand perception impact on loyalty impact on margins discounting wars with competitors
- 17. Scarcity Scarcity is closely related to price The price will go up soon The discount will end soon There are a limited number This offer only available for customers from... / who...
- 18. Fake Door Testing Possible in a modified manner with price tests, but can be tricky. Can pair with limited quantity messaging when done authentically. More easily done with product
- 19. Free A free version can bring in lots of potential customers Offering a free version can be viewed as an advertising expense Free can be important or even necessary from a competitive standpoint Free can also impact brand perception and ability to sell very high end products Free can also incur support costs Free can be a way to get valuable customer feedback to improve the product Free can be a way to build a network effect for certain offerings Free has a cannibalization impact that can be measured
- 20. Free Trial To test: Credit card required vs not Trial period Auto-charged or not Feature limits What happens if customer doesn’t end up paying. Do any features remain? Any data saved?
- 21. Refer a Friend as Pricing “Refer 3 friends to get an additional 1 GB of space” is a form of price... instead of paying you money, they are paying you in-kind with social-based marketing How else can you “charge” without asking for dollars? content uploads P2P disk usage data or other ways to help build/grow the product
- 22. Price Display Actual Price Total amount Per Month, Per Day etc. Perceived Price Valued at Compare at Price before of after discounts? Component Value Price Display Strike though List Discount Display % off $ off You save Badges Best value Most popular
- 23. Magic numbers Endings .99 .95 etc Round numbers Trick specificity
- 24. Package Hiding Companies tend to ever expanding product flavors and package sets. Over time what started out as a rational for the business becomes a drag on conversion Simplest way to approach price testing is to trim back the lines offered to a more management set (1 to 3) Supplementary packages can be hidden completely or pushed down to deeper levels or segment-based marketing – excluded from general pop messaging This approach will give some idea of loss due to hazards of excessive choice
- 25. Loyal Customer Pricing Upgrader discounts 1st year premium Minimum period
- 26. Quantity Pricing Buy more save more Usage based
- 27. Indecision Risk Too many price value trade-offs and prospects bail out Must also find right level of product detail to not overwhelm, but still sufficiently inform
- 28. Component Values Hard to market all the features or benefits Should quantify relative value of each and present as such Each package must have one sufficiently high value component for important customer segments
- 29. Negative Example
- 30. Negative Example Strike through only on one package Huge jump between low and mid package Highlight (“best value”) on most expensive package Package/Pricing but no CTA based on that info State fees buried elsewhere Inconsistent messaging about differences between packages Combination of transaction, subscription/trial, and lead gen not easily parsed
- 31. Positive Example
- 32. Positive Example Odd number of packages Center package is recommended Pricing displayed at the lower-seeming “per month” amount Original strikethrough price, % off highlighted & amount saved Dead-simple benefits list; Clutter free design Visual hierarchy of CTAs Risk-free messaging Minimal asterisking This page was tested extensively:
- 33. Game Changing Examples Amazon Prime Amazon partner / affiliate store Apple App store Southwest Airlines Netflix Adobe Creative Cloud
- 34. Conclusion Price testing encompasses a huge array of testing possibilities Price testing requires a serious commitment and some finesse to get right Price testing is likely the biggest lever you have