How to figure out what price to charge via split testing

Sspivey asked in a recent comment about how to know how much to charge for a product. This blog makes the assumption that he is asking about products sold via the web, although the process outlined here applies to almost any type of product sales.

First, some background. Before the web (for those of you too young to remember that simpler time), direct marketing professionals developed a series of processes that now inform lots of web-based marketing and sales.

So, let’s say the marketer of an Elvis collector plate wanted to know whether to charge $19.95, $29.95 or $39.95 for a “limited edition” Elvis plate. He (or she) would conduct a 3-way split test as follows:

1. Mail out three direct mail pieces to the same list (e.g. people who have visited Graceland and signed their name and address on the guest register). Send only to enough names for a statistical test (usually 10,000 names does the trick).

2. Change only ONE THING on the mailing: the price. Split the mailing 1/3, 1/3, and 1/3 to the same list, but offering the plate at a different price point.

3. Collect response and determine which offer got the best response (e.g. most profit after all expenses).

This technique is much better than focus groups, interviews, or anything else because it quickly measures ACTUAL RESPONSE RATES.

Web marketers have taken this approach and applied it to the web. Don’t know how much to charge? Do the following (simplified here; there are many variations):

1. Set up your banner ad to go to one of three URL’s. This is very easy on Google Adwords, and you can do the same with services like Doubleclick et al.

2. Create three different URL’s (e.g. www.yourproduct.com/test1 — but call it something more elegant, like /yahoo1), each testing a different price point.

3. Again, collect responses and determine which URL gets the best response. That will tell you which price to charge.

The best marketers on the web use this approach to test different advertising services, prices, offers (e.g. whether to offer 3 easy payments), and different banner ads.

Please post any refinements you make to this general approach…..

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  • http://www.jamesinteractive.com ecaptus

    Mike, That’s a tough question. I’m sure part of the problem you are having is you are too worried about what other companies charge. Try to come up with a pricing structure for different levels of service. If you are too high, you’ll see it in less project wins. If you are too low, you may get more wins, but you’ll find you profit margin to be much less than ideal.

    Thanks!
    Steve

  • http://www.mission36teen.com M36Teen

    So, would you say it is better to start out asking for a high price, and then come down if you need too?

  • Dano

    Mike: “a business website that doesn’t sell anything and that does not directly save costs”

    You are always selling something. There are methods to quantify the efficiency, based on the results you need to achieve: more sells, more visits / time per visitor, corporate image perception, positioning, brand recordation, empowerment, anything.

    There is a purpose behind every communicational action that you take.

    If you plan the site according this principle, you can prove that you are in the right way, in any step of the plan you are.

    For example: you can compare the results against the last year results, or against an average number on the industry. You are always talking about numbers, thats the language of business. This have to be accorded before the site construction, in the planning step.

  • sspivey

    Regarding the posying form mission36teen.com, I saw in action in a previous job that a significant part of the perceived value is just that, percieved. Part of that price. If I charge $50.hour for consulting while all my competitors charge $125, prospects WILL wonder why and most will likely conclude I don’t have the skill or business acumen my competitors have. ==> It’s easier to start high becuase it’s easier to come down on price than increase price.

  • http://www.jamesinteractive.com ecaptus

    I think it is easier to start high. Now, I have worked on projects that a former employer won because we way underbid, but we ended losing money in the end.

    If you start too high, chances are you won’t win the project. If this happens, follow up with the prospective client for feedback. You’ll get a better feel for the next proposal.

  • http://www.mission36teen.com M36Teen

    Cool, thanks guys.

  • hey chief

    on line testing of price-using multiple sites

    gentlemen: i have been told that you can have a site that has an A – B split built into the code.? actually the split could be 10 different offers! allowing very fast testing of marketing models. who knows the answer to this question? can it be done? if yes, what does it take to do it?

    peace
    chief

  • http://www.michaelkrenz.de mkrz

    I think many of us sell services rather than products. Now, I have already understood that it’s important to sell based on value. But often I just don’t know how to determine this value – how do you quantify the value of, say, a business website that doesn’t sell anything and that does not directly save costs? This is a question that has really bothering me for a while, and so far I haven’t found an answer.
    Michael K.