How to figure out what price to charge via split testingBy Andrew Neitlich
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…..