Experiments are great. They help us test our hypotheses. If the experiments are not designed to test a specific hypothesis for a specific goal then what is the point of conducting them? If the experiments do not teach us something new or move us further in the direction of your goal, why bother?
Pricing experiments are no exceptions. There is no dearth of them. But most experiments we see and read in the social media fall in the category no net new value category. It is true that pricing is a very hard problem. There are many known unknowns and unknown unknowns. It takes effort, data and some very boring and laborious work to chip away at the problem. When faced with the difficult question of, “What pricing method will help maximize my business value by driving profit and revenue?”, most substitute it with a simpler question, “What pricing trick can I do to get a few sales and media attention?”.
The real question requires you to understand customer segments, their needs (what job do you want them to hire your product for?), the budget customers pay from for the product, the alternatives competing for the customer job to be done, the cost of alternatives, the incremental value your product creates over all other alternatives.
The substitute question is easy to frame and answer. Let us assume something and call it an experiment. If it succeeds it was to our credit. If it did not, it was an experiment anyways. After all pricing is a very hard question, no wonder we did not succeed.
One such case is what we see from Everyone, an online fashion retailer. They say this about their pricing model,
Their assumption, which seem to be taken almost axiomatically is,
“Customers want to know the costs of products they buy”.
So they show their detailed costs breakdown, their overheads and margins. Have we seen this before? Yes, in the extreme form of cost based pricing I illustrated a few years ago,
The simplest counter argument that negates their premise is that customers do not buy product to offset our costs. They have a need to fill or a job to be done. They hire the right product that will get the job done under constraints. Our costs are just that, our costs. Not a concern for our customers.
Everylane states pricing in fashion retail is messed up with 8X markup. It is true. I have explained this detail before. But that does not mean we throw away first principles and opt to answer the simple but wrong question.
Pricing is about getting your fair share of value you create for your customers. As a online retailer Everlane seems unclear what unique value it creates for its customers. So it is hoping customers will gladly pay to offset its costs and cover its margin.
Wrong and futile!