A Complete Guide to Split Testing Your Pricing Strategy

Pricing is a crucial strategy for expanding an organization, yet it's frequently disregarded. Studies reveal that brands can boost gross earnings by as much as 6% only by putting a pricing testing strategy into practice. 
It is only fair to say that you could be losing out on substantial revenue prospects if you don't test.
However, how to know when to split tests on your pricing strategy? 
In this blog, we'll provide practical tips to help you identify the right strategies for effective split testing in your retail operations.

Why To Split Test Your Pricing Strategy?

Split testing, often known as A/B testing is an effective way of increasing revenue that compares two different pricing models to see which works better than the other. You can evaluate changes in conversion rates and sales precisely by running each model separately for a predetermined amount of time. With this data-driven approach, you can find pricing options that significantly boost overall profit or sales in your ecommerce store.
Studies show that a mere 1% change in price might result in a significant 8.7% increase in operating profitability. However, there could be significant financial losses if data-driven testing is not used to optimise pricing.
You can make sure that you're applying the best pricing at the correct moment by creating a methodical split testing plan that helps you match your pricing decisions with your specific goals and growth objectives.

How To Split Test Your Pricing Strategy?

There are a number of ways in which you can split test your pricing for your ecommerce business.

Establish Your Pricing Factors

Decide which particular components of your pricing strategy you wish to test. This could apply to the starting price, special offers, discounts, packages, or other marketing strategies. Select factors and metrics that support your company's goals. For instance, you can play with various bundling strategies if your objective is to raise average order value (AOV).

Choose Items for Inspection
Select items that are appropriate for A/B testing. Take into account recently introduced products, underperforming products, and products for which you are not certain of the best price. Pricing can be especially delicate in the consumer packaged goods (CPG) sector. You can use split testing to determine which pricing will maximise profits for each of your products.
Establish Test Groups
Separate your traffic into two groups: a test group and a control group. The test group will see a new pricing variation, while the control group will see the old pricing. By using multivariate testing, you can examine different variables within each group. For instance, you can compare a price with free shipping against a discount with flat shipping.
Carry out the test
Throughout the test, keep an eye on important indicators like total sales, average order value, and conversion rates. Examine how various price differences affect these measures. Assess whether lowering pricing increases conversions or the sales impact justifies a possible decline in profits. Keep an eye on user preferences and behaviour.
Examine and Improve
Review and adjust your price plan on a regular basis in light of the test results. To stay competitive and give your customers a satisfying experience, take the state of the market into account and modify your prices appropriately. A/B testing combined with a well-thought-out pricing plan will help you maximise sales and profitability.

Use Cases Of Split Testing By Leading Brands

A/B pricing Testing enables companies to determine the best price point by carefully analysing the responses of different client groups to different price changes. Businesses can make data-driven judgements through controlled experiments, which lead to more smart pricing strategies and eventually higher income. This marketing strategy also ensures that any changes are carefully considered before being fully implemented, reducing the risks associated with price volatility.

Use case 1: Airbnb

Airbnb, the company that invented house sharing, carried out a thorough trial to improve its price policy. Through carefully manipulating the advertised costs of similar properties, they discovered an intriguing association: slight increases in price did not discourage prospective visitors but instead significantly raised the business's revenues.

Important Takeaways:

1. It takes skill to strike a balance between optimal pricing and consistent booking rates.
2. Monitoring and assessing visitor behaviour required the use of complex split testing tools.
3. By adopting a data-centric pricing strategy, Airbnb was able to increase its profit margins.

Use case 2: Amazon

Amazon ran tests to see how various free delivery levels might impact their overall revenue. They determined the optimal threshold that increased average order values while retaining customers by experimenting with different minimum purchase quantities needed for free shipping.

Important Takeaways:

• Determining the ideal ratio of incentives to profitability requires testing several approaches.
• Encouraging consumers to spend more money without preventing purchases.
• Modifying plans on a regular basis to take consumer and market trends into account.

Use case 3: Netflix

Split testing is frequently used by Netflix, a well-known streaming service, to optimise its pricing strategy and strike a balance between profitability and client retention. They found through A/B testing that, in general, consumers are prepared to put up with slight price increases as long as they result in better streaming quality and easier access to fresh content.

Important Takeaways:

• Split testing helps uncover how added value impacts customers' sensitivity to price.
• It's critical to strike a balance between the possibility of losing members and growing subscription fees.
• Customer satisfaction can be maintained by providing evidence of improved service features to support price modifications.

Frequently Asked Questions

What’s the main purpose of split testing pricing?
The key aim is to find a price point that maximises profits while keeping customers satisfied and loyal.
How long should a pricing split test be conducted?
The duration depends on factors like customer base size and the length of your sales cycle. Typically, it should run for several weeks to ensure enough data is collected for meaningful insights.
What are common mistakes when split testing pricing?

1. Using a sample size that's too small, leading to inaccurate conclusions.
2. Overlooking seasonal or external factors that might skew customer behavior.
3. Failing to account for customer segments, resulting in one-size-fits-all pricing that misses opportunities for personalization.