Price Elasticity Parabola

If there is one defining characteristic of ecommerce it’s the retailer’s ability to experiment with pricing.  And yet, I have never, not once, been asked to run a test that validates a client’s assumption about product prices.  It’s as though they have a Platonic sense of what the market is willing to bear.  Now, I understand that it isn’t just e-tailers that can experiment with prices, and that most brick-and-mortar stores also conduct price tests but when you factor in the speed with which you can run a price variation online and the sample size that can be inexpensively included in the test it’s obvious your online store is THE destination for all price tests.

The reason why price testing is so important is because, for every product, there is a very specific price point that generates the highest net profits.  And because retailers don’t know what this is they just accept the price currently displayed on their site is that number.

Recently, Chicago based Lettuce Entertain You restaurants ran an experiment at their Foodlife location.  They developed a $10 special that includes soup or salad, any entree on their huge menu, dessert, and a drink.  Foodlife has 14 distinctive kitchens within one location and the entree can be picked from any kitchen!  To understand how radical this is one needs to consider that in any other Lettuce Entertain You concept you’d be paying twice as much for the same meal.  What they made sure was that even at $10 they were making a small profit.  Here is what happened- sales volume doubled and people started returning for full-price food.  Initially, about 65% of customers were sticking with the $10 deal but a few months later that dropped to 40%.

Can you imagine how hard it is for a restaurant to adjust prices?  It’s a logistical nightmare, not me mention very expensive.  Now, in this instance Lettuce Entertain You experienced fantastic results but the experiment could have failed, and reverting prices would have taken even more money and time.  An online retailer has none of these concerns.  If a particular price point yields sub-optimal results just turn the experiment off.  And if you are super paranoid you can even run the experiment for very specific segments: like first-time visitors, or just organic traffic, or email click-throughs.  The point is, you can run the experiment for a segment you are comfortable with; but please, run the experiment.

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