The success of your pricing strategy goes hand-in-hand with the success of your business. Once you have an initial price, it’s critical to regularly test to ensure it’s still the best one for your product or line of products. Run these seven tests to find out if adjusting your prices could earn you more revenue.
1. Test How You Display Your Prices
Even if you have the right price, the way it’s displayed might not be optimal. Research published in the Journal of Consumer Psychology found that the longer a price appeared on a page ($1,000.00 vs 1000), the more expensive the item was perceived to be. This is because we internally sound out the prices we come across and associate longer verbal lengths with higher values meaning that a longer price to read subconsciously results in shoppers interpreting the prices as larger.
Decimals and dollar signs also add to the length and it’s worth A/B testing price changes to exclude currency symbols, decimal points and cents.
2. See The Power Of 9 For Yourself
While customers perceive shorter prices as smaller, it’s also true that ending prices with .99 or .97, or a little less than a round number is a psychological strategy that profoundly affects buying decisions. Also known as charm pricing, this tactic was rigorously examined by William Poundstone in his 2010 book Priceless, and his finding was that charm pricing tended to boost sales by up to 24%.
If you’re planning on testing how you display your prices, it’s a good idea to test charm pricing as well before eliminating the decimals and cents.
3. Price Similar Products Differently
When two similar products are priced almost identically, customers can have a hard time choosing between them. One research experiment offered two groups two separate scenarios. Both groups were given a dollar to spend on gum or keep for themselves. However, in the first group, two similar gums were offered at the same price, 63 cents per pack. The second group saw the two options priced slightly differently, one at 62 cents and the other at 64 cents. The second group saw 67% more sales.
Testing this pricing strategy involves identifying the potential comparisons customers are making between different products and then seeing if there’s a chance customers are having difficulty distinguishing between them. Test out different prices for your products, perhaps there’s an opportunity to differentiate them further based on price, making it easier for your customer to decide.
4. Optimize Your Product Bundles
If you have a complementary product mix and some of your products are underperforming, it’s worth exploring how they might fit into a bundling strategy. An effective set of bundled prices may work to bolster the sales of the lower performing product without cannibalizing the sales of others. Working together, a well-priced bundle may have the effect of increasing both your average order value and your overall revenue.
Price bundling is a way of offering a discount, but often companies approach it the wrong way. In order to optimize the price for your bundle, it’s important to consider the way your products interact with each other.
Consider two products: an online electric guitar course, priced at $100, and a online acoustic guitar course, priced at $50. It’s not a big stretch to imagine that customers could be interested in both courses. But while the electric guitar course is selling well, sales of the acoustic guitar course have stagnated. Bundling the two courses might be the best way to offer a discount and promote sales.
You can offer a 20% discount two ways, by selling the two course bundle for $120, or by discounting the acoustic guitar course by 60% to $20 while keeping the other price constant. The end result is the same in terms of revenue, but which option is more likely to encourage customers to buy the bundle?
When both products are discounted, customers who purchase the two products together are rewarded with a discount (regardless of which course they want more). However, when only the acoustic guitar course is discounted, customers who only want the electric guitar course won’t see the value in paying an extra $20 for something they didn’t initially want.
Making sure your bundled prices are matching the value customers place on both products is the key behind an optimized bundle price.
5. Test Alternative Price Anchors
Much the same as struggling to decide between two similarly priced products, customers can have trouble assigning value to products without some primer information.
In a test example discussed here, researchers primed students and real estate experts with different listing prices for the same home along with all the particulars of the property, and asked them to estimate the actual value of the home. Both the students and the pros estimated the house to be worth more when primed a higher listing price.
For your business, if you have more than one product or if you have different tiers, you can increase the perceived value of all of your products by raising the price of your most expensive option. This also allows you to test out higher pricings for your cheaper offerings because even at a higher price point, the less expensive products will appear reasonably priced by comparison. Finding the sweet spot in the price spread between your products is the trick to making the most of this strategy. Changing the price of the more expensive offering first will make it easier to raise the price of the lower priced product later.
6. Try Decoy Pricing
If your products are varied, even if your products are priced substantially differently, customers could have trouble making a decision. In the real-world, you can grow revenue by adding a decoy into your product mix.
If you find that your customers are having trouble deciding between products A and B, adding a third product, that’s similar to A but slightly worse (A-) will help demonstrate the value present in the product you want to direct customers to (in this case, A). The Economist famously utilized this pricing tactic to push subscribers to purchase their higher priced, bundled subscription.
Test out this pricing strategy by adding a decoy product next to your higher-priced, revenue-driving product. By showing the new product only to a subset of your site visitors, you’ll be able to accurately track the increase in revenue from the change.
7. Let Your Customers Choose
The “name your own price” strategy is a fairly unconventional one, but in some cases, it can provide amazing insights into how much customers are willing to pay for a certain product.
Numerous companies have used this pricing strategy, sometimes with success. For example, Radiohead claims that their “pay what you want” album actually generated more revenue than any of their other albums and World of Goo experienced solid revenue gains when they implemented it.
This approach can be particularly effective online when marginal costs are low but testing it out in the real world can be a tough sell. You could try to get buy-in for the idea by creating a special “pay what you want” anniversary offer on an existing product, the results could provide significant insights into both how customer value your product and the original price of the item.
Bringing It All Together
While all these tests can help you optimize your price, the best pricing strategy for your business depends on the specifics of your product and customer. Using these 7 strategies as a framework for your testing will make it easier to methodically drill-down to your optimal price, maximize your revenue and keep your customers happy.