Product Price Testing: What Is It and How to Do It

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Although pricing a product might seem easy at first glance, the reality is different. A wrong price could break down a fully standing business in weeks. On the contrary, it could help a product take off to dominate the market despite robust competition.

Many business owners and entrepreneurs concentrate only on product development, but what about price testing? Determining a product price is a complex process that requires following an accurate scientific manner. It impacts market demand, commercial reputation, quality perception, and overall business success.

As a result of recurring economic and political crises in a world where wars might spark in a moment, pricing is not random. It depends on many factors, including the manufacturer, target customer, and market environment. This article will introduce the different stages of product price testing and its practical methods in detail. 

What is Product Price Testing?

The price test is a company’s method to determine ideal product prices. Many factors affect the price testing process, including profit margins, purchasing power, consumer behavior, competitor prices, and shareholder restrictions. Although every business aims for high revenue, the optimal pricing should balance generating profits with demand persistence.

Companies should never ignore the benefits of price testing:

1. Elaborate the price customers are willing to pay for a specific product.
2. Measure the percentage change in demand based on the percentage change in price.
3. Determine market demand elasticity against a particular product price.

Pricing is one of the most common problems entrepreneurs and small business owners face. It is confusing because they often have no clue about pricing products correctly. Many price their products without studying the market or learning about the competition or the target customers. 

For example, pricing the product significantly low to attract buyers might fire back at quality expectations causing consumers to avoid buying the product. Similarly, setting high prices to earn more might result in a total failure due to competition.

The famous American investor Warren Buffet says, “Price is what you pay, value is what you get.” As simple as it sounds, it indicates that customers pay for the value they’ll get from the purchase. Therefore, the relationship between pricing and value is dynamic and flexible.

A successful company analyzes the added value its product is bringing to the table, then prices accordingly. However, other factors have to be reviewed, like the competition. Price testing helps locate the sweet spot between what the company wants and what the customers would pay.

Testing Product Pricing

Testing product price has to go through multiple stages to ensure accurate results. Companies looking for long-term success have to follow these steps. Once everything is ready, they can utilize the proper price testing method to get the final result.

Defining the Goal of Testing

Companies price their products differently for various reasons. The first step in price testing is identifying the endpoint or objective for the pricing of product. There are several goals companies generally share:

1. Enter the competition baldly and become popular in the market.
2. Finding out the reasonable price range customers would pay for a product.
3. Obtaining the largest possible market share during a specific time.
4. Increasing company revenue by increasing capital cash flow.
5. Testing the market flexibility before launching other products.

Choosing a Right Testing Time

There is no reasonable answer to how to determine pricing for a product without setting the appropriate time for the price testing. Companies interested in the process should take into account the economic situation, market condition, and sales activity.

For example, an unsettled economic situation could result in a general rise in exchange rates. It would force companies to update the profit continuously to achieve a profit rate commensurate with the consumer’s income. Similarly, the market condition controls the competitor pricing and consumer buying power which are key factors in price testing.

Choosing Products

After defining the price testing group, and the right time for it, you might be asking yourself, how do I price my product? You’re pretty close, but first, you should analyze the market to determine your competitors.

1. Choose products that fall within the same category as yours. Moreover, they have to share the same basic features with your product.
2. Analyze what distinguishes each product of the same category from the others, and note that down for future reference.
3. For an accurate assessment, compare the prices and features simultaneously.
4. The final list of products you’ll get is your competitors’ list.

Data Collection

Now you should think about how to determine the price of a product, and the answer relies on the data collection process. Data collection is the most important step before conducting data analysis to reach the final results and decide the final product price. Following are the primary data required at this point:

1. The company’s profit margin for the product.
2. The production cost of a single unit, including all direct and indirect expenses.
3. Monthly and annual taxes and tariffs.
4. Local and international market prices for competitor products.
5. Market research and target consumer behavior analysis and statistics.

Analyzing Results

Pricing analysis evaluates the current pricing strategy to identify opportunities for the price change and potential improvements. Since pricing is not only related to new product launches, price testing could occur at any point in a product life cycle. 

Companies might conduct a pricing analysis periodically every year or two. Furthermore, in some cases, every two months to evaluate their prices compared to competitors and discover consumer expectations. 

Pricing in these cases is a preventive measure to protect the company from deterioration in sales and profits. It’s necessary to regularly set a better pricing strategy and set an ideal product price.

Pricing analysis requires:

1. Use the data collected in the previous step to determine the actual product’s cost.
2. Understand how the target market and customer base respond to the pricing structure, including price, discounts, offers, etc.
3. Competitor analysis, including products and prices.
4. Examine legal and ethical restrictions that may affect cost and price.

Price Testing Methods Existing

Companies use price testing methods to calculate the optimal pricing for their products. Several methods differ in application and circumstances. However, all aim to reach a price suitable for the current market situation, cover production expenses, and achieve profits.

A/B Testing

A/B testing is a marketing tool commonly used to test how a customer interacts with two changing options. Moreover, it’s been one of the primary pricing methods since its nature helps in price testing. As the name indicates, it is about suggesting two prices to determine the most appropriate one.

A/B testing is based on trying two different prices simultaneously to see which one is the best. The company collects data on these two prices, notes how people respond to each price and their reactions, and analyzes it to make the best pricing decision. 

There are some counter-arguments to the practice of A/B testing for pricing. For example, suppose one of the company’s customers wants to buy a particular product, and its price is known in advance at $25. When the customer notices the new price is $60, set for testing purposes, that might upset customers and cause disappointment. You may lose them and will drive away other customers as well. Another disadvantage is having a group of customers who previously bought the product for a lower price recommending it to their friends to find out later that it became expensive.

Surveys

Surveying is the process of systematic collection of information. It is used to obtain information about the market, quality of product, and its price. The survey uses several tools to collect information, including questionnaires or Interviews. 

A questionnaire is a research tool through which questions are used to collect information from sample members. The questionnaire can be used in an opinion poll or in scientific research to measure the effect of variables on each other. Through questionnaires, price testing is possible to measure how different prices impact consumer behavior.

Several opinion polls or surveys could be utilized as price testing methods. For example, an online survey is done by e-mail or via a web page, and these are the least expensive tools. In contrast, a personal in-home survey is where customers are surveyed at their homes, which is costly.

Besides price testing, surveys are helpful in various stages of project development. Nowadays, many companies use surveys to support their marketing research and deliver customer-oriented campaigns. For example, collect participants’ thoughts about product design or test backers’ reactions to crowdfunding promotion campaigns. 

Conjoint Analysis

It’s a marketing research tool used to gather information from customers regarding a product. The focus point is to assess how customers value the product and its benefits. It builds a knowledge base to help decision-makers make better business decisions. When a company has a comprehensive database of customers’ opinions and evaluations of its product, it will be able to develop an ideal pricing strategy.

The conjoint analysis is usually done via survey and has various types; to explain how can firms use marginal analysis to determine the price of a product, let’s introduce you to the most common types of conjoint analysis

Choice-Based Conjoint Analysis CBCA

It’s the most used type of conjoint analysis, and it depends on showing several choices of products and services to the participants, and each product or service has specific features and prices. The participants or respondents imitate the real purchasers in the market, and their evaluations of the product’s features and prices are taken into consideration later on.

Adaptive Conjoint Analysis ACA

This type of analysis is used when the product attributes or features are numerous, and the company wants to test the best features to keep, promote, or cancel. This type is used when the number of features examined with the respondents is much more than those discussed using CBCA.

All respondents’ evaluations are analyzed according to their answers to the survey questions. This type is used to choose the products’ features and attributes rather than the price.

Monadic Price Test

It is another marketing research technique that is used to evaluate price sensitivity. It is called monadic because respondents examine only one price. There should be a large number of respondents like 100 respondents, for every price point. 

This method is used by introducing one price to a group of respondents via an online survey or questionnaire, and the prices are randomly exposed to each group of participants. For example, suppose a company is going to test a price for wireless earphones, they shall choose a range of prices and show each one to a group of participants, but each price should cover the profit margin. When the monadic price test is done, if the results are as follows:

• 40$: 23%
• 50$: 27%
• 55$: 35%
• 60%: 29%
• 65%: 24% 

After randomly measuring the respondents’ purchase intentions, the company shall analyze the result and decide to price the wireless earphones at 55$ price. It easily helps how to determine the selling price of a product. Similarly, it could be applied to other products and services.

Closure

Regardless of the product type, the price will directly impact the business’s success. Product pricing is not static, and it requires a constant effort to adapt to changing market and customer requirements. Due to e-commerce and technology development growth, analyzing competitor prices and products is easier than before. Moreover, monitoring changes and digitally conducting research made the task applicable.

Whether you’re considering going for an A/B testing price or a survey, everything can be organized online efficiently and quickly. Although product pricing models can be complex, the basic rules are straightforward. They all help businesses find out how much a customer is willing to pay for a specific product. 

If you are still hesitant and suspect, does A/B price testing work? We’d advise you to try it yourself and check the results. However, remember that Before setting a price for your product, you need to know the costs of running your business. If the price of your product or service does not cover costs, your cash flow will be cumulatively negative, your finances will be exhausted, and your business will eventually fail. 

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