Try Price Testing

By Steve Gillman

Yes, it can be tedious to do price testing in your business, but it can also be one of the best ways to maximize your profits. If you haven't done it before, you might be under the impression that you want a price that brings in the most customers. That might work for Wal-Mart, but the ultimate goal is not the most customers nor the most revenue. The bottom line is still profit.

Let's look at an example to make it clear how doing something that reduces your customer base can still increase your profits. Suppose you own a flower shop and your best-seller is a bouquet that is priced at $20, and it costs you $15. Now let's say you sell 100 of these every month for a gross profit of $500 ($5 x 100). What if you raised the price to $27, and that reduced sales to just 60 per month? Now your gross profit is $720 ($12 x 60), on fewer sales.

Your goal then, in general, is to find the price point that generates the most profit. That's a bit too simplistic to be a hard rule, of course. After all, you might increase profits in first weeks following a price increase, but then lose more and more sales in the following months as your customers find new places to buy more cheaply. Also, a lowering of prices could result in enough additional sales that profits go up at first, but if that also triggers a price-war with your competitors, you might all make less money down the road.

Where price testing works best is with simple products and services that are somewhat unique, so both direct comparison and replacement are unlikely. For example, if yours is the only dog-massage parlor in town, your concern won't be losing out to the competition.

I was selling my "Secrets Package," a collection of e-books, for $17 at one time. About $14.70 of that was profit after processing fees. I decided to try a price of $27. At that price my profit is about $23.95 each. I figured that after reading the sales page perhaps 25% fewer people would choose to buy at the new price. But if that happened, I would still make 22% more profit ($1,796 versus $1,470 per 100 sales).

As it turned out, the conversion rate (the number of buyers divided by the number of visitors) didn't change much at all. I sold just as many at the higher price, so I boosted profits by 63% just by raising the price. You only learn these things by testing.

There are sometimes cases where you can essentially do the price testing in your imagination before making a decision. This is especially true with items that have low profit margins to begin with.

For example, if you only make 10 cents on a $3.40 impulse item in your store, you double your profit by raising the price to $3.50. You would have to lose more than half of your sales for this to backfire. You can probably safely assume that won't happen without even bothering to track the results after the price increase.

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