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 improve 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 precisely evaluate changes in conversion rates and sales by separately running each model for a predetermined amount of time. 

This data-driven approach helps to significantly boost overall profit of your ecommerce store. 

Studies show that a mere 1% change in price can result in a 8.7% increase in operating profitability. However, there could be significant financial losses if data-driven testing is not used to optimize pricing.

How To Split Test Your Pricing Strategy?

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

1. Establish Your Pricing Factors

Decide which particular components of your pricing strategy you wish to test. This applies to the initial price, special offers, discounts, or any 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).

Also read: Our comprehensive guide on 7 game-changing ecommerce strategies.

2. Choose Items for Inspection

Choose products that are appropriate for A/B testing. Take into account recently introduced products, underperforming ones, and those for which you are not fully certain of the best price. 

Pricing can be a delicate element in the consumer packaged goods (CPG) sector. You can use split testing to determine which pricing will maximize profits for each product.

3. 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. 

Thus by using a multivariate testing strategy, you can examine different variables within each group. For instance, you can compare a price with free shipping against a discount with flat shipping.

4. 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. Do not forget to keep an eye on user preferences and behaviour.

5. 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 maximize 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 analyzing the responses of different client groups to different price changes,  businesses can make data-driven judgments through controlled experiments. It also leads to more smart pricing strategies and eventually higher income. 

This marketing strategy also ensures that any changes are carefully considered before being fully implemented. Thus it also reduces 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.

Use case 4: Starbucks

In order to assess the effect on sales and customer retention, Starbucks regularly tries pricing adjustments across various markets. For example, they tried raising the cost of some high-end drinks while keeping the less expensive ones the same. The outcome? While consumers on a tight budget stuck with the less expensive selections, premium clients kept buying their preferred drinks, which greatly increased revenues.

Important Takeaways:

• Segmenting pricing based on customer demographics can optimize revenue without alienating core buyers.
• Testing pricing variations in limited regions helps identify patterns before wider implementation.
• Premium offerings can attract high-value customers even during price hikes, provided quality and experience remain intact.

Use case 5: Uber

Uber controls supply and demand with dynamic pricing, sometimes known as surge pricing. For example, during peak hours or in high-demand areas, they tested raising prices to see if customers would still book rides. They discovered that most riders chose to pay the higher rates for convenience, even if some waited for costs to decline. This improved driver availability and helped Uber balance its network.

Important Takeaways:

• Dynamic pricing allows businesses to adjust to real-time demand while maximizing revenue.
• Data-driven algorithms and A/B testing help fine-tune pricing strategies to minimize customer attrition.
• Transparent communication about why prices fluctuate is essential to maintaining trust.

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.

Author

Chandni Bhavsar

Chandni, a skilled project manager, brings the perfect blend of creativity and technical know-how to Shopify stores. Her approach to ecommerce stores is all about making the user experience feel like a breeze. Passionate about staying ahead of the curve, she not only manages projects smoothly but also loves educating others on the latest Shopify trends, helping them keep their stores vibrant and competitive.