Small price changes can yield short term gains. Price testing can make them long term.

Sometimes coincidence yields incredible discoveries. Take Sir Isaac Newton, for example.

He discovered the Universal Law of Gravity after an apple coincidentally fell and landed on top of his head. Of course, he didn’t develop his theory in that very spot. He went home and conducted various experiments.

Coincidences and discoveries need to be tested to be properly applied, and this completely holds true in the retail industry.

Retailers need to test various aspects of their businesses to make sure slight changes actually warrant desirable results beyond coincidence.

One factor retailers need to test regularly is pricing. Retailers are constantly changing prices and recording the data that comes with it.

Standard economic theory suggests that price increases lead to decreases in demand. However, A/B testing often proves this wrong.

Retailers have discovered that slight price increases sometimes yield increased profits and traffic to their site.

However, instead of sitting on this short term success, retailers need to take their testing a step further and create long term value for themselves with one pricing strategy: dynamic pricing.

Dynamic pricing allows retailers to find the sweet spots along their pricing curve that can actually push it outward.

This enables retailers to generate more revenue and profits at the same relative price points.

But how exactly can they push the curve? 

There are two major aspects retailers need to consider when testing their pricing strategies: the competitor price index (CPI), and their own brand value.

The CPI provides you with a list of competitors’ prices for the same or similar product. Using this index lets you map out where you stand among your competitors, and gives you an opportunity to grow. 

Strong brand value enables you to sell at premium prices. It buys you a little more wiggle room to test your products’ prices above your competitors’, rewarding you with more profit and revenue.

When testing these prices, retailers need to conduct their pricing tests with highly elastic products that are the most popular.

Since the ecommerce landscape is so crowded, consumers can easily switch to another competitor, so many retailers make the mistake of cutting their prices. In many cases, this is the wrong move.

Before you begin cutting your prices, you need to test them against your competitors’ prices to see how they perform with shoppers.

Take Target for example, whose price testing has resulted in consumers spending 5.1% more per store visit.

It has strengthening its brand value, and is changing its perception to a store shoppers can turn to for unique merchandise, not just commodity products.

This will give them more power in their pricing, and help them stand out from other big box retailers. 

Say you have a competitor who is selling something for $2. Start testing by pricing yours slightly above theirs at $2.50.

You need to keep this price long enough to find statistically significant changes in your sales so you know a change in sales and profits is not coincidental.

If you’re successful, increase the price a little more. Measure your site traffic and compare it with sales of the products you are testing. If your traffic is high and your conversions are low, then it’s time to lower the price.

If the opposite is true, you’re doing even better than you thought.

The point of this is not to match your competitors’ prices, it’s to ultimately maintain your brand value. S

lashing your prices is the easiest way to damage your brand equity and your profits. You don’t want to be the cheapest, you want what’s best for your brand.

Instead of selling your brand short, test price changes in the market to find the sweet spot in your pricing.

Conducting pricing tests with a dynamic pricing strategy can help you shape your long term pricing strategy and improve your brand value. It helps you find sweet spots in your prices to increase profits and boost conversion rates.

Testing price changes can lead to improved branding, pricing strategies, and more for your business. Short term price changes can be aimless, but a dynamic pricing strategy teach you what you need to do to get ahead of the competition.

Price cutting does not always lead to success, and the data that comes from dynamic pricing proves that.

Ari Shpanya

Published 22 May, 2015 by Ari Shpanya

Ari is the co-founder of HomeShare and Zent , Graduate of the GSB Stanford Ignite program, and a contributor to Econsultancy.

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Comments (1)

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Deri Jones, CEO at SciVisum Ltd

Hi Arie, nothing you're saying is wrong as such, but you've not mentioned the potential down-sides of dynamic pricing: which for some retailer may be significant.

Firstly, that if you have a lot of repeat customers: dynamic pricing may allow some products to be surprisingly expensive (you mentioned starting 25% up from your competitors) , which could undermine your purchasers trust that 'this brand is always good value, so I don't bother any more to compare prices elsewhere'.

Secondly, I wonder, perhaps for some stores it may take an unexpectedly long time to achieve your easy-to-write but harder-to-do:
> ...keep this price long enough to find statistically significant changes in your sales...

It would be interesting to hear real world experience from dynamic pricing users; how long do they set and hold an initially high price for, before lowering it?

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