Practical Price Testing
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Transcript of Practical Price Testing
Practical Price Testing
Jared Waxman
Pricing Challenge in Summary
Nichols & May “$65 funeral”
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...
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
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
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.
Toolset
Tougher to do with off-the-shelf testing tools
Often requires building own testing and reporting capabilities
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.
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
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.
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.
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
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
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
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
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
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...
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
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
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?
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
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
Magic numbers
Endings .99 .95 etc
Round numbers
Trick specificity
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
Loyal Customer Pricing
Upgrader discounts
1st year premium
Minimum period
Quantity Pricing
Buy more save more
Usage based
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
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
Negative Example
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
Positive Example
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:
Game Changing Examples
Amazon Prime
Amazon partner / affiliate store
Apple App store
Southwest Airlines
Netflix
Adobe Creative Cloud
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