Prices continue to play a critical factor in the decision making process when it comes to purchases. Additionally, today it is easier than ever for shoppers to compare prices. So, how do you figure out how to not only make shoppers happy but also your business? Price testing will help you out. But what is it?
What is price testing?
Retailers use price testing to analyze the association between demand and changes in price. Through it, you can figure out the demand elasticity so that you can establish the most optimal prices for both yourself and your shoppers.
To figure it out, divide the marginal cost by one plus the division of one and the demand elasticity. Through the result, you will be able to unveil the price point for every item in your inventory. As a result, you can make the most profit possible while, at the same time, ensure a reasonable degree of customer lifetime value. So, how can it be useful for your firm?
How is price testing useful?
The beauty of price testing is that you can do it with a confined scope, with separate times, and with different item categories. In addition, you can try out a variety of different pricing strategies for each group or SKU. However, while establishing prices through lasting sales history is much simpler since that previous data unveils how different types of price changes could influence the demand, it’s not always possible. In those kinds of cases that you don’t have relevant previous sale data, pricing tests can come in handy. Therefore, it is vital that you first identify where your price floor and price ceiling is. This way, you can make sure that you never end up at a point where you are losing out. Based on those two numbers, you can figure out where your price point lies, which is where you will be able to make the most profit.
To carry out this test, you need first to identify your starting price. To figure out the initial price, add a margin to the cost of the product. You can also use the value-based approach to outline the starting position of the price test. As soon as you have figured out the starting price, you can begin gathering data and analyzing how the test influences your profits and demand. One way you can do it is by collecting data, using promotions, outlining interim time frames, and then evaluating all of the information. However, you can also do this through A/B testing. In this case, you would provide customers with two different kinds of prices for one item during the same period to analyze which one does better. This option tends to give the most accurate results since it tests different prices at the same time under conditions that are exactly the same. However, this method is not perfect since it there is a chance that price discrimination will occur. After all, prices are made different for different types of shoppers based on their power to make a purchase. Thankfully, though, there are better and more reliable methods available!
Using advanced pricing tools
The best way to find the optimal price, though, is with the help of advanced pricing software. For example, with Competera, you can test out a variety of pricing scenarios that include predefined strategies and even your own ones. The results are very accurate since they are based on the past sales of items similar to the one you are testing. Therefore, as you can see, with the help of a tool, you can easily accomplish price testing, ensuring that you have the most optimal prices at any given time.