When you are introducing a new good or service, one of the most challenging decisions is figuring out the appropriate price for your offering.
This is because pricing affects your conversions directly. And if your price is too low, you can find it difficult to survive. But, if it is too high, you run the danger of losing business or turning off a lot of your potential clients.
So, how do you choose the ideal price range for your product? In this article, we'll explore price testing, different price testing methods, and frameworks to choose to best price for your product and skyrocket your profits.
What is Price Testing?
Price testing is a method of determining the ideal price for a product or service. It involves understanding the willingness of potential customers to pay for your products in order to boost revenue.
Why is Price Testing Important, and Why Should You Care?
Price testing helps you maximize your profits without alienating most of your customers by setting up ideal prices for your products. It is particularly helpful when you need to set prices for a new product for which you don't have sales data.
In general, when the price of a product increases, its demand decreases. However, this doesn't mean you should not set higher prices or increase prices for your products, or else you would fail to survive in the long run. Thus, finding that "sweet spot" or ideal price is important.
So, here are a few benefits of price testing:
- It helps determine an optimal price based on the current market situation so that customers don't choose the competitors over you. For this, you should also conduct market validation.
- Price testing helps set prices for new products that don't have a sales history or record.
- It helps you sustain and thrive in the long run by not keeping absolutely low prices.
How to Validate Willingness to Pay? (Price Testing Methods)
Now that you're familiar with the importance of price testing, we've put together a price testing framework to help you plan your own price test.
- Determine what you'd want to achieve with price testing and set your goals accordingly.
- In case you're into multiple product categories, select which category you'll test first and then choose products within that category.
- Pick a method for testing your price by carefully understanding which one would work best for your goals.
- Collect a high volume of data to draw meaningful results and make decisions.
- Compare your revenue and profit before and after implementing a price change, and note all the changes you have seen since then. Analyze these results to make the final major decisions based on them.
- Define Your Revenue Streams
Defining your revenue streams or source of income is extremely important for any business to keep the business going. Choose a revenue stream that works well for your industry and product – it may be a one-time customer payment like sales or a recurring revenue like a subscription.
1. Asset Selling
An asset sale often involves a single transaction involving an asset that is owned by either an individual or a business.
Pricing Model Examples
- Upfront for each product we sell, looking for a 40% unit margin.
- $1,000/piece - fixed for the product
Product/Brand Examples
- Apple Iphone
- Tiffany & Co.
Suitable Product Categories and Industries: Retail, Real Estate, Books, Automotive, Info Products, Consumer Goods
2. Usage Fees
This revenue stream is generated by the use of a specific service. The cost of service increases with the amount of consumption. Customers may be charged by a telecom provider based on how long they talk on the phone. Clients of a hotel pay for the number of nights their rooms are occupied. Customers pay a package delivery service to deliver their packages from one place to another. When you rent a car, you pay for the distance you use it for.
Pricing Model Examples
- 5$/mo → 1 GB of internet, 15$/mo → 5 Gb of internet, 45$ / mo → Unlimited GB
- 12$ → 1 night stay, 35$ → 3 night stay, 50$ → 5 night stay
- 10$/mo → 200 channels, 15$/mo → 400 channels, 20$/mo → 500 channels
Product/Brand Examples
- AWS
- Azure
- Car rental by kilometer
Suitable Product Categories and Industries: PaaS, Car Rental, Internet by the Giga, SaaS, Telecom, IaaS, Information access
3. Product Subscription
This revenue stream is generated by selling ongoing services. The use of a gym's facilities is provided in exchange for monthly or yearly subscription fees from its members.
Pricing Model Examples
- 30$/mo → 5-50 leads generated, 50$/mo → 51-100 leads (or charge by the user or other pricing models)
- $9.99/mo (individual), $12.99/mo (dual), $15.99/month (family-6 accounts), $4.99/month (students)
- Personal - $5/mo, Premium - $8/mo, Business - $25/mo, Get Commerce - $45/mo
Product/Brand Examples
- Slack
- Leadfeeder
- WordPress
Suitable Product Categories and Industries: Productivity Services, SaaS
4. Membership
This includes getting access to certain kinds of content or community in exchange for a fee on a regular basis.
Pricing Model Examples
- * 5$/mo for read-only members, * 15$/mo for premium members, * 35$/mo for VIP members
- Individual membership for $15 per month and then a group membership of $50 for a 5-member organization.
- 15$/mo → 1 month gym membership, 40$/mo → 3 month gym membership
Product/Brand Examples
- Medium
- Peak Freelance community
Suitable Product Categories and Industries: Community, Blogs, Information access
5. Renting, Leasing, Lending
This type of revenue stream provides someone the sole use of a specific item for a predetermined amount of time in exchange for a charge. This offers the lender the benefit of recurrent income. On the other hand, lessees or renters gain from short-term expenses rather than having to pay the complete cost of ownership.
Pricing Model Examples
- 500$/mo
- 100$/mo → 2 rooms, 150$/mo→ 3 rooms
Product/Brand Examples
- Tesla
- Zipcar.com
- Ford
Suitable Product Categories and Industries: Furniture Leasing, Auto Motive, Home Leasing
6. Service Fees
This revenue stream is generated by availing specific services by individuals or agencies and paying them a fixed amount of fee for the project or on an hourly basis.
Pricing Model Examples
- 350$ / hour of work
- 100$ / deliverable
Product/Brand Examples
- Marketing Agencies like WillShall Consulting
- Content Agencies like Pepper Content
- Freelancers
Suitable Product Categories and Industries: Law, Consulting/Agency services
You can also learn about popular online business models in detail and pick one that's suitable for your business needs.
- Prove That There are Enough Customers Willing to Pay for Your Value Proposition
Once you have chosen a revenue stream for your business, it is important to gather strong evidence that your customers are willing to pay for your product. This can be done by making sales or sales commitments in a contract or crowdfunding, or any other kind of financial commitment/support.
1. Crowdfunding
In terms of raising money, crowdfunding is exceptional because it enables you to simultaneously identify the market, acquire traction, and get that crucial funding injection.
Suitable Product Categories and Industries: Consumer Goods, Gaming, Retail
Suitable Business Models: B2B
How to execute?
- Define your value proposition
- Start a campaign on sites like Kickstarter
- Share it online
Recommended Tools & Resources
2. Pre-Orders
Before you launch the actual product, you can keep it open for pre-booking to reduce your risk and understand its demand in the market. Pre-booking prices can be lower than the product prices to attract more prospects.
Suitable Product Categories and Industries: eCommerce, SaaS, Info Products, Real Estate
Suitable Business Models: B2C, B2B SMB
How to execute?
- Create a landing page with your value proposition
- Add pricing for pre-orders. Ask for a credit card/PayPal to have hard validation.
- Promote it via email marketing or other ways and collect orders.
Recommended Tools & Resources
For creating your landing page without investing a lot of time & money, we strongly recommend using no-code tools like:
3. Web Sales
Generate sales for your products or services directly through your website to ensure people are willing to pay before you invest heavily in building apps or complex sales systems.
Suitable Product Categories and Industries: Info Products, SaaS, e-commerce, Professional Services, Real Estate, Consumer Goods, Consulting/Agency Services
Suitable Business Models: B2B SMB, B2C
How to execute?
- Create a landing page with your value proposition accepting sales before you launch the product
- Announce a doable deadline for your MVP
- Charge and collect payments
Recommended Tools & Resources
To generate sales, we strongly recommend the following no-code tools:
4. Sales Contract
Signing a sales contract for a deal can give you assurance of its sale. Thus, it can act as another way of ensuring you have buyers for your product.
Suitable Product Categories and Industries: SaaS, Manufacturing, Consumer Goods, Real Estate, Retail, Consulting/Agency Services, Automotive
Suitable Business Models: B2B ENTERPRISE, B2B SMB
How to execute?
- Have a prototype (if it's a physical product) of the product and the sales pitch of your value proposition.
- Pitch it to B2B targets.
- Offer them a huge discount in exchange for being the first customer case (but make them pay something).
- Sign a contract to have commitment proof.
Recommended Tools & Resources
- Networking on social media and offline events
- Outreach Linkedin (use tools like cleverly.co and zopto.com to generate leads)
5. B2C Marketplaces
Look for marketplaces where you can find customers directly who can buy products for which you want to test demand. It can help you understand whether there's an actual demand for your product and if it's worth investing in.
Suitable Product Categories and Industries: Consumer Goods, Retail
Suitable Business Models: B2C
How to execute?
- Have some stock of the product you want to test the demand (after having tested a prototype)
- Sell it through well-known digital channels before you build your own and manufacture more units.
Recommended Tools & Resources
- Facebook Marketplace
- Ebay
- Amazon
- Etsy.com
- Look for local marketplaces
6. Gigs Platforms
Marketplaces, where you can list the services you offer in exchange for a certain fee, can give you assurance of the demand for your services. You can price it based on the number of hours you work or projects you complete. Such gig platforms usually have a target audience who are constantly looking to avail of your services.
Suitable Product Categories and Industries: Professional Services, Consulting/Agencies Services
Suitable Business Models: B2B SMB
How to execute?
- Design your professional service and add it to one of these marketplaces.
- Once you have some commitments, start building your own agency page or productized service.
- Build your marketing channels and go test the sales commitment approach with bigger customers.
Recommended Tools & Resources
- Fiverr.com
- Upwork.com
- Toptal.com
- Look for local platforms
More Price Testing Methods
Apart from the above-mentioned price testing methods, you can also opt for the following methods:
Surveys
Surveys are an effective way of doing price testing as they enable you to ask questions to your prospects without annoying them by pitching your product. You can also carefully choose the demographics and test sample to set the right audience and get precise results.
Monadic Price Tests
Monadic price testing is excellent for already established products and when you already know what price range to advertise. Multiple pricing points of the product are examined using a split cell test. You present a product with a description and ask the customer how likely it is that they will buy it for a specific price while offering the respondent options ranging from very likely to extremely unlikely on a scale of 1 to 7. The purpose is to create a price sensitivity curve and collect purchase intent at various price points. So, you ask the question again, but this time you give a different price. To obtain more detailed findings, perform this step more than twice.
Price Laddering
The purpose of the price laddering is the same as that of the monadic price test. In this scenario, respondents are shown a range of prices (typically ranging from higher to lower) and asked to select how likely they are to buy at that price. If they do not select one of the top two options (most likely to purchase), they are then presented with the next, lower price, and the procedure is repeated until they reach the price point at which they will most likely purchase. It requires a smaller sample size.
Conjoint Analysis
Conjoint analysis is a wonderful strategy to employ if your product hasn't yet been released and you don't have a clear idea of the price range and features you should offer. It is especially useful for products that can have many versions, such as an ordinary and a pro version of a smartphone.
Respondents are asked to choose from a variety of product profiles. This means you're offering several features for a set price, and respondents must choose between them.
Monitor Competitor Pricing
If you don't sell a unique product and other businesses sell the same thing as you, price testing will be easier on the one hand, but more difficult on the other. This is because you cannot simply establish a price for your product; you must also consider the pricing set by your competitors. Thus, while you will have an idea of where to begin, you must use a pricing tracking tool. In this manner, you may avoid setting a price that is significantly higher than what your competitors are asking for a product.
A/B Testing
An A/B price test involves running a test with two alternative prices to discover which produces the best results. However, it may be a terrible idea to use A/B testing for price testing.
Why A/B price testing could be a potential pitfall:
- You may risk undermining your brand reputation and customer loyalty by charging higher from certain customers than others for the same product.
- The number of shoppers may not be enough in the case of premium or some other products. This can result in inadequate data collection and inappropriate results that can't be generalized.
- Price discrimination can cause legal troubles for the owners.
- A/B testing is relative and not absolute. This implies that it can help determine which of the two pricing options is better (based on the conversions), but it cannot suggest the ideal price for a product.
Common Pitfalls to Avoid While Price Testing
Price testing is an intensive process. However, the following typical mistakes can hinder the integrity of your data collection efforts:
- Failure to adequately isolate variables: Make sure to isolate the variables you wish to test and rule out any other factors that could alter your data. For example, do not test prices for new products concurrently with a significant marketing effort. It may be very difficult to understand whether the increased sales or revenue were a result of the pricing change or marketing activities.
- Assessing conversion rather than revenue: Select your A/B test winner based on total income earned, not conversion data. Because even if your sales fall when you raise your prices, your overall revenue may increase.
- Inadequate data collection: If you don't have a large enough sample size or amount of data, your results won't be statistically significant, and you shouldn't make any major judgments based on them. So, try doing it on a larger scale.
- Not conducting competitive research: When determining new price points, you don't always have to start from zero. How much are your competitors selling it for? Are you able to compete with those prices? Would your competition grab market share from you if you raised your rates above a specific threshold? Consider all of these aspects.
Conclusion
Pricing tests can be difficult and time-consuming, but it's important to get the pricing of your products correct the first time. This is because it can make or break your business. There are numerous price testing methods, and choosing one may be difficult.
But we hope that this guide helps you pick the right one for your product and industry and make you win at your pricing decision. Remember that price testing, although important, isn't the only sort of testing you need to conduct.
Here're a few more resources to help you better understand the pricing strategies and models:
- The Ultimate Guide to Pricing Strategies
- Pricing Strategy Guide: Best Resources and Examples
- A Definitive Guide to SaaS Pricing Models - Strategies, Examples, and Top Metrics to Track
- 12 Proven Pricing Strategies and Models
- Cost and Economics in Pricing Strategy
And, here are some more in-depth guides for startup idea validation:
- Idea Validation: An In-Depth Guide with Examples, Action Plans, Free Resources & More
- Problem Validation: 5 Simple Ways To Validate Your Customers' Pain Points Based On Evidence
- Market Validation: All You Need to Know to Validate Your Target Market and Launch with Confidence
- Concept Validation: How to Validate Your Product Concept in 5 Steps [with Free Bonus Tips & Resources]
- Message Testing: How to Conduct, Proven Methods, Tool Recommendations & Best Practices
- Product Validation: Why It Matters, Step-by-Step Action Plan, Free Tools & Resources
- Customer Validation: Guide To Validate Your Customer Base, Along with a Suitable Go-To-Market Strategy
Written by Aastha Kochar, a freelance writer at Shnoco.
