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- Factors Impacting the Pricing Strategy
- Understanding Different Pricing Strategies
- 1. Cost-Plus Pricing Strategy
- 2. Competition-Based Pricing Strategy
- 3. Value-Based Pricing Strategy
- 4. Penetration Pricing Strategy
- 5. Price Skimming Strategy
- 6. Dynamic Pricing Strategy
- 7. Psychological Pricing Strategy
- 8. Premium Pricing Strategy
- 9. Anchor Pricing Strategy
- 10. Keystone Pricing Strategy
- 11. Bundle Pricing Strategy
- 12. High-Low Pricing Strategy
- 13. Captive-Product Pricing Strategy
- 14. Geographical Pricing Strategy
- What is Price Testing?
- Why or When Should You Conduct Price Testing?
- Methods for Testing Pricing Strategies
- How to Conduct Price Testing
- Final Thoughts on Setting Effective Pricing Strategy
- FAQs on Pricing Tests & Strategies
How to Test Your Pricing Strategy Effectively: A Comprehensive Guide
Pricing can make or break your profit, and thus, long-term sustainability.
That’s why you must be mindful of implementing any pricing strategy. While you want to build a profitable business, you also need to ensure that your offerings are attractive to your ideal customers.
You may also need to test pricing before introducing a new product, making changes to existing pricing, or entering a new market.
In this blog post, we’ll help you learn about different pricing strategies and methods for testing pricing strategies. Plus, a step-by-step guide on how to conduct price testing.
Factors Impacting the Pricing Strategy
Before discussing pricing strategy or testing methods, we must understand the important factors that need to be considered in pricing decisions.
Here are the key factors that any brand should consider when defining its pricing strategy:
- Product Cost & Other Expenses: What is the cost of manufacturing or sourcing the product or service? Other expenses may include the eCommerce platform fees, shipping costs, operational costs, etc.
- Product Supply & Demand: Consider the availability of the stock and demand in the market.
- Brand & Product Perception: Your brand or product perception can heavily influence your pricing decisions. Depending on whether you want to position your brand/product in the premium or an affordable category, your pricing needs to be set accordingly.
- Target Market or Region: What market or region are you targeting? If you're selling in different countries, you may also need to consider purchasing power parity (PPP) to decide pricing for different regions.
- Market Competition: How competitive is the market for the product or service you’re selling? High competition can influence pricing decisions as customers will have many options to go for. On the other end, low competition could work as an advantage to set the desired pricing.
- Product Quality: You may be selling the same product as many different competitors are selling, but if your product has unique differentiation in terms of features or quality, you can charge higher than your competitors.
- Ethical Consideration: While any business would want to make a profit, it must be ensured that your brand is considering ethical values and setting fair prices.
Understanding Different Pricing Strategies
There are many different pricing strategies being used by different businesses. You need to identify which pricing strategy is suitable for your business.
1. Cost-Plus Pricing Strategy
This is one of the most commonly used pricing strategies, because it’s an easy one, and logically makes sense. In this pricing strategy, you just add your profit margin to the product cost.
Formula: Total Cost of Product × (1 + Desired Profit) = Selling Price
A cost-plus pricing strategy ensures that your costs are taken care of along with the profit margin. The key is to define your desired profit margin which may vary depending on the type of business or product.
2. Competition-Based Pricing Strategy
As the name suggests, the pricing in this model is set based on the analysis of the pricing strategy of competitors. Based on the pricing data of competitors, a benchmark is set and then the selling price can be set slightly lower or higher.
The goal here is to stay ahead of the competition. If you’re running a business in a highly competitive market, your pricing can become one of the key differentiators.
3. Value-Based Pricing Strategy
As the name suggests, value-based pricing is the strategy where you set the price based on what your customers perceive as the worth of your product or service. Thus, in this strategy, you’re not considering the cost or competitor pricing as the primary factor.
This pricing strategy lets you set a higher markup and earn more profit. On the flip side, in certain business types, you may not be able to charge too high based on the perceived value.
This pricing strategy can be quite suitable for service businesses or SaaS (Software as a Service) brands. A service can be valued much higher based on how big impact it can make to an individual or business.
4. Penetration Pricing Strategy
If you’re a new brand trying to get your feet in the market, you can implement a penetration pricing strategy.
In this pricing strategy, you’d purposefully set lower pricing to attract new buyers and get the initial sales and reviews. Once you start establishing your brand in the market, you can gradually start increasing your pricing.
5. Price Skimming Strategy
The price skimming strategy is the opposite of the penetration pricing strategy in terms of its concept. Price skimming is the strategy in which the initial price of the product is set high and then it’s reduced with time.
Typically, this pricing strategy is adopted by the brands that have the first-mover advantage, meaning their product is so innovative or different that it has quite a low or no competition in the market.
Thus, the brand can leverage the advantage to gain a high profit margin in the initial phase and then expand into the market by making it more accessible to price-sensitive customers at a lower price.
6. Dynamic Pricing Strategy
Dynamic pricing is an advanced pricing strategy in which the current price is constantly updated on a real-time basis based on multiple factors. These factors may include market demand, stock availability, ongoing market trends, and so on.
Dynamic pricing allows you to keep a healthy profit margin regardless of ups and downs in the market and changes in consumer behavior. To implement this pricing strategy on your Shopify store, you can install a dynamic pricing app from the Shopify App Store.
Learn more: Maximizing Revenue & User Satisfaction with Dynamic Pricing in eCommerce
7. Psychological Pricing Strategy
Psychological pricing is the strategy that considers customer psychology in setting the prices in a way that makes the amount look smaller.
You must have already seen many brands offering pricing like $9.99, $49.99, $199.99, and so on. It’s almost everywhere except for some premium brands that intentionally avoid such pricing.
We can say this pricing is suitable for a price-sensitive audience.
“Because we process data from left to right, the encoded magnitude of $2.99 could, at least in some situations, be significantly less than that of $3.00.” - A Penny Saved
8. Premium Pricing Strategy
Premium pricing is also known as prestige pricing. It is the pricing strategy where the brand chooses to keep higher prices than competitors to build a perception of a premium brand.
This type of pricing is not suitable for every brand. It depends on what kind of product you’re selling. For example, if you’re selling products like jewelry and fashion items, it could be more suitable for your brand to adopt premium pricing.
9. Anchor Pricing Strategy
Price anchoring is a strategy where you set a high original price for the product and then offer it at a discounted, lower price. The idea is that the initial high price creates a perception in the customer’s mind of high value and then the low price sounds like a great deal to grab.
Anchor pricing could be a quite suitable strategy for brands selling high-ticket items.
10. Keystone Pricing Strategy
Keystone is the pricing strategy in which you just double the base cost/wholesale price of the product. Thus, it allows a healthy profit margin.
Formula: Wholesale price × 2 = Retail selling price
Basically, this pricing strategy covers 100% markup. This is one of the widely used pricing strategies as it helps enhance the profitability of the business.
11. Bundle Pricing Strategy
Bundle pricing is the strategy where you can encourage customers to buy products in a bundle package to get a certain discount. This pricing strategy is great for increasing your average order value (AOV).
This pricing could be suitable for many eCommerce brands, especially if you’re selling products like beauty and personal care products, food items, clothing products, and so on.
For Shopify store owners, there are many product bundling apps available in the Shopify App Store. These apps can help you create product bundles with discount offers and promote them in various ways.
12. High-Low Pricing Strategy
High-low pricing is the strategy in which the brand promotes the low-priced product to attract new buyers to the store and display the high-priced product together. This way, the brand can convert buyers who are also interested in high-ticket offerings.
To implement this pricing strategy, you need to have a range of products in both price categories.
13. Captive-Product Pricing Strategy
Captive-product pricing is the strategy implemented by brands that have a core product along with additional offerings or complementary products.
Apple is a great example of a brand that uses captive-product pricing. The smartphone is Apple’s core product. Other accessories such as chargers, phone cases, and earpods are captive products.
14. Geographical Pricing Strategy
Geographical pricing is a strategy in which brands consider different regions where they're selling their products and adjust the pricing depending on different regions. This pricing strategy is useful when you’re selling in various markets with different economic statuses.
Geographical pricing strategy can be further divided into the following different types:
- Zone pricing
- FOB (Free On Board) pricing
- Freight-absorption pricing
Pro tip: While you can finalize and follow one certain pricing strategy, it could also be possible that you need to combine more than one pricing strategy. For example, you may go for the penetration pricing strategy but also consider the competition-based pricing strategy to ensure your price is competitive.
What is Price Testing?
Price testing is the process of testing different prices for a product or service to finalize an ideal price that can entice customers to buy your product/service as well as help you earn a healthy profit margin.
Why or When Should You Conduct Price Testing?
In a market full of competition, you need to make sure that you have pricing that entices customers to purchase from your brand. At the same time, you also need to ensure your profit margin is healthy enough to build a sustainable business.
Conduct the price testing when you’re in any of the following situations:
- The profit margin is going down
- Change in the market conditions
- Looking to scale the business
- Entering a new market or region
Methods for Testing Pricing Strategies
1. Price A/B Testing
A price A/B testing is a method in which you can create two or more different landing pages with different price points and see which one gets better conversion.
Make sure to keep all other elements exactly the same because you want to observe the change in behavior influenced only by pricing.
For example, create one landing page with the product priced at $24.99 and another one at $29.99. Analyze which landing page gets the most sales with the same amount of traffic.
Challenges in price A/B testing method:
Although it sounds quite simple and easy method to implement, there are some challenges in using this method:
- Offering different pricing to different sets of customers might lead to an adverse impact on your brand’s image and trustworthiness.
- In certain countries, it may be illegal to charge different amounts to customers as it can be perceived as price discrimination.
- It may turn out to be difficult to gather statistically significant data through this method.
With all that said, A/B testing is a great technique for other use cases, such as testing your product images, copy, CTAs, or other website elements.
To run A/B testing for your product or landing pages, you can use GemX — our new Shopify app. GemX can help you enhance the performance and conversions of your landing pages, templates, or other content assets.
2. Pricing Surveys
You can conduct a pricing survey to get customer feedback on pricing or include a price-related question in the general survey.
These surveys could be either pre-purchase or post-purchase surveys. Post-purchase surveys could be helpful to make sure your product is not overpriced.
For example, once the customer has completed the purchase, you can ask the customer if they found the product worth the money.
Learn more: Post-Purchase Surveys: Guide, Examples, and Questions
3. Conjoint Analysis
This method could be helpful when you’re introducing a product with many different features. In the conjoint analysis technique, the customers are offered different sets of features at different prices to gauge which one is most valuable to them and prepare the pricing strategy accordingly.
You can use a tool like Conjointly — an all-in-one survey research platform — to run conjoint analysis.
4. Monadic Price Test
A monadic price test is a methodology in which market research is conducted for specific product concepts. Customers are given multiple concepts of a product for evaluation.
This price testing method can be quite useful to test a concept and set the pricing strategy as well. The survey respondents are offered a certain concept in isolation and the price can become the key factor in the evaluation.
5. Price Laddering
In the price laddering technique, respondents are presented with a series of pricing options that may typically start from higher to lower. The respondents are asked to evaluate how likely they are to buy the given product/service at the given price point.
If the respondents are not likely to buy at higher price points, they’re shown lower price points, and the same process is repeated until the best price point is identified. This way, you can identify the most suitable price for your ideal customers.
How to Conduct Price Testing
Now, let’s go through the step-by-step guide on how to test your pricing strategy:
Step 1: Set Clear Objectives for Pricing Tests
Not every business has the same reason to conduct price testing. Define specific objectives and goals you wish to accomplish through price testing.
Here are some examples of price testing objectives:
- Maximize the profit
- Increase revenue through more sales
- Enhance customer retention rate
- Increase market penetration
- Build a certain brand perception
Based on whatever objectives you define, establish success metrics. For example, if your goal is to enhance the customer retention rate, you should measure metrics related to the same.
Step 2: Finalize the Method of Price Testing
We already discussed various methods for price testing.
Choose which method you want to go for depending on your objective, product type, target customers, and resources.
Again, if we take the example of the customer retention objective, you might want to go for the post-purchase survey method to evaluate if the customers are truly satisfied with the product/service for the money they paid.
Let’s take another example: Let’s say you want to maximize your profit. In that case, price A/B testing could be a great option to find the highest price point with an acceptable conversion rate.
Step 3: Conduct the Testing
It’s time for the real test now!
Based on the price testing method you selected, make sure you’re prepared with all the resources and requirements.
As we mentioned before, if you’d like to conduct price A/B testing, you can install GemX — our new Shopify app. GemX is designed to help Shopify merchants enhance their landing pages, templates, and content with A/B testing.
So, you can test different versions of a landing page with different price points. Conduct the test on an appropriate sample size to derive statistically significant data
Step 4: Analyze the Test Results
Once the testing is completed on the required sample size, you can analyze the results to make sure a data-driven decision is made after considering all the necessary aspects.
You may also have to reiterate based on feedback before coming to a conclusion.
Step 5: Prepare Your Pricing Strategy
Based on your analysis, create a new pricing strategy. Monitor your new pricing strategy over time and see how it’s performing and if any further testing is required.
Final Thoughts on Setting Effective Pricing Strategy
Keep in mind — an effective pricing strategy is the one that’s acceptable to your customers first. Your business goals can be accomplished only when your customers are happy or satisfied with your brand.
Thus, it’s incredibly important to know what your customers feel about your pricing. Also, you should use customer feedback before implementing any changes in your pricing strategy.
To learn more about eCommerce marketing strategies and best practices, check out more resources on GemPages Blog. Join the GemPages Facebook community to network and learn from like-minded entrepreneurs and experts.
FAQs on Pricing Tests & Strategies
