So you are running a price test? But how do you determine which price wins?
It may seem like a dumb question, but it’s not. Sometimes the obvious answer is not the right one.
First, let’s establish the goal of the price test. In most cases, your goal will be to sell more of Product X. But you don’t care about just the raw volume of products sold. You care about revenue. And you care about profitability.
However, some companies use products as loss leaders, offering low prices to get customers in the door in hopes that they spend more money down the line. In that case, you might look at raw customers or sales to judge a winner.
And when launching a new product, your goal might be to drive as much revenue as possible, without caring as much about profitability. That would also change the metrics you use to judge the results of your price test.
But assuming your goal is profitability, you are going to measuring total contribution. To do that, you will need to know your variable cost per unit sold (marketing cost + cost of goods). Your contribution margin is the difference between the revenue and the variable cost.
If you sell 20 X’s at $20 per, and the variable cost per unit is $5, then you made $300 in total contribution (20 – 5 = 15 x 20 = 300).
And if you sell 25 X’s at $18 per, with a variable cost still at $5, then you made $325 in total contribution (18 – 5 = 13 x 25 = 325).
So in that case, $18 is a better price.