How to Quickly Optimize Pricing for E-commerce Products

Planning to sell a new product online?

Early price optimization gives you a significant advantage. That’s because it can help you reach profitability faster, and most small marketers that I’ve worked with don’t do it at all as a deliberate step.

How should you price your product?

You have plenty of pricing strategies to choose from. For example, if your product is very similar to others on the market, you might undercut the competition to attract early sales (penetration pricing). Alternatively, you might position yourself as a “masstige” or even premium product/brand.

However, many new products are innovative with no clear competition for pricing reference. The value to the consumer may be hard to quantify (ruling out value-based pricing), and the cost of goods are low, allowing wide pricing latitude. So should you sell high-volume at $29.99, or go for $49.99?

Find optimum pricing using your demand curve

 

The above is an actual demand curve for a new product we’re testing. You’ve probably seen charts like this in a long-ago microeconomics class.

Our test product has a simple sales funnel: traffic is from Facebook ads, which hits our sales landing page, then enters a standard checkout flow.

The primary (left) vertical axis shows the product price. The horizontal access shows the resulting sales conversion rate (% of traffic that results in a sale).

As you’d expect, the higher the price, the lower the conversion rate.

The blue line is the profit (gross per unit sold). You can see the profit peaks at a conversion rate of about 1.75%, which is reached with a price of about $45.

So $44.99 is an optimum price point to maximize profit.

E-commerce Pricing strategy: Choosing a nonoptimal price

The above only considers maximizing profit-per-sale, and there may be reasons to deviate from that point.

For example, if you have limited product supply, you may choose to sell fewer units at a higher price, and rely on bonus items to increase conversion.

You may also want to optimize your profit margin instead of gross profits, which generally have different optimal pricing. In this example you can see the optimum profit margin happens at $40, but the optimum gross profit at $45.

In the case of our test product, we’re selling at a lower price ($19.99) in order to get more conversions and data points, which lets us optimize our sales funnel faster. From the chart you can see that our $19.99 price actually results in $0 profit (breakeven), because the goal of test-marketing is to learn, not to profit.

How to generate your product demand curve

Simply do a split-test on your pricing. Test at least two prices with enough traffic to reach statistical significance. If your e-commerce software doesn’t easily allow split testing, do it sequentially instead.

Three or more price points is even better. With just two points, you must assume a linear price-demand curve, and your results may be affected by price point effects.

Calculate conversion rate in the standard way:

Conversion (%) = 100 * (total sales) / (sales page visitors)

 

Consider all your variable costs to calculate profit:

Profit (per unit) = Price – (Cost of Goods) – (Cost Per Order) – (fulfillment, etc.)

Profit = P – COG – CPO

 

For our test product, the COG (including free shipping and fulfillment) is $7. The CPO is (ad cost per click) / (conversion rate). So for example a $0.60 CPC / 2% = $30 CPO.

Price elasticity of e-commerce products

Once you calculate your demand curve, the slope of your curve indicates your product’s price elasticity. A steep curve means a small change in price results in a large change in sales volume. Or you may find your curve is fairly flat (“inelastic”), meaning that your market is relatively price insensitive.

Knowing your demand curve can help you plan your whole e-commerce strategy, including how to craft better offers, such as running BOGOs or bonus items.

 

How to do a Beauty Product Loyalty Analysis in 5 steps

How many brands or products are you loyal to? Would you believe it’s in the hundreds? While you may only name a handful of brands that you feel loyal to, your buying behavior is at least as important as your feelings.

This article outlines how to analyze the competitive loyalty landscape before launching a new consumer product. The results indicate a strategy to win trial adoption and consumer loyalty.

Attitudinal Loyalty

If you like Starbucks, Ikea, and BMW, you have some degree of attitudinal loyalty towards those brands. You prefer them over alternatives for reasons other than cost or convenience. Brands work hard to build attitudinal loyalty for obvious reasons: it’s a powerful way to build repeat business, and a competitive advantage.

Behavioral Loyalty

So why do you actually visit Dunkin’ Donuts, shop at Walmart, and drive a Toyota? Behavioral loyalty describes what people actually buy, which often involves cost and convenience considerations. While you may enjoy shopping at Ikea, they sadly don’t sell bread and milk, yet.

You can dislike a brand and still exhibit behavioral loyalty: you may not love your telecom provider, but you still pay the bills. You can also have attitudinal loyalty without buying anything: you like Tesla, but won’t buy one until the price drops to meet your budget.

How Loyalty Matters to New Brands and Products

Introducing a new product into a competitive category requires breaking, and then winning the loyalty of customers. To create a loyalty-winning plan, it’s important to understand what kind of loyalty customers have, why they have it, and exactly what it would take to break it and win it.

How to Assess Loyalty in Your Target Market

The best way to assess loyalty is by asking consumers using surveys. That’s because buying behavior can be seen in standard market research reports, but the reasons driving that behavior and how consumers might react to a new product can only be estimated by asking them. The techniques below were developed by HIT Laboratories to assess competition and loyalty for new health, beauty, and cosmetics products.

Step 1: Similar Product Usage

Loyalty is only an issue if your target market thinks your product competes with what they currently use. In the below example, 43 percent of respondents don’t use a product similar to the one tested. That reduces the marketer’s challenge for that large segment to conveying the product’s value, rather than breaking existing loyalty.

new_product_market_loyalty_research_1

Step 2: Product Comparison

For the remaining 57 percent who already use a similar product, how does the new product compare? If it doesn’t appear to be at least slightly better, it has a slim chance at replacing it. In this example, a combined 57 percent thought the new product was better overall than what they already use.

new_product_market_loyalty_research_2

Step 3: Know your Competition

What exactly is the target market currently buying? Below is an excerpt from hundreds of actual responses. Sometimes respondents will cite a product that doesn’t appear to be competition. But what we think is irrelevant; it’s competition if your market thinks it is.

new_product_market_loyalty_research_3

Step 4: Competition-Loyalty

Now that the competition is known, how loyal is your target market to those competing products? Behavioral and Attitudinal loyalty can be separately assessed by asking respondents questions about their feelings and purchasing history.
new_product_market_loyalty_research_behavioral_attitudinal_loyalty

Step 5: Loyalty Quadrant

Possible marketing strategies become apparent by plotting the attitudinal vs. behavioral loyalty. While this is a complex topic, we can generally say that if there is low behavioral loyalty, consumers are frequently trying alternatives, possibly swayed by new product offerings, discounts and coupons, or variety-seeking behavior. This suggests it may be easy to acquire trial purchases, and focus should be put on programs or features that drive loyalty to retain customers.

If there is low attitudinal loyalty for competing products, there may be an opportunity to create a brand with more personality or other likable attributes. This strategy has been clearly visible among North American telecom providers over the past decade, as they’ve attempted to infuse their brands with distinct personalities.

new_product_market_loyalty_research_6

Other Product Marketing Considerations

After assessing the nature of loyalty among the target market, examine the specific ways a new product could gain and hold customers. This is beyond the scope of this article, so these considerations will only be summarized below.

Competition-Loyalty Reasons

Respondents who use a similar product are asked why they buy it rather than any other product. These reasons can help in designing a strategy to gain market share.

Switching Potential

Respondents are assessed for how likely they are to switch to a new competing product for a trial duration. Even very loyal customers may be open to a free product trial, depending on the product type.

Switching Incentives

Respondents indicate what specific incentives would cause them to buy the new product over their current one on a long-term basis. This can indicate the best basis of competition.

The above Loyalty Analysis is a standard component of the Cosmetics Assessment Standard (CAS) study, which assesses the appeal of new health and beauty products and provides actionable product improvement and marketing insights.

Health and Beauty Ingredient Selection: Familiarity-Desire Analysis

Understanding consumer desire for product ingredients is important, but ingredient familiarity is also important to consider. Consumers may have low desire for an ingredient because they are not familiar with it, despite the ingredient providing excellent benefits.

Hit Laboratories developed the “Familiarity-Desire” (F-D) ingredient analysis to help health and beauty product developers with their ingredient selection and marketing.

health-beauth-product-ingredient-fd-analysis-desire

Ingredient desire results. Results based on a target market survey.

 

Familiarity and desire scores are calculated from several survey responses. The results are different for each product tested, since ingredient desirability depends on the specific application.

The chart below shows familiarity and desire scores plotted across four quadrants. For this product, Aloe vera is both highly desirable and familiar to consumer respondents. Corn oil is the least desirable ingredient, and it’s familiarity in this application is also poor.

health-beauth-product-ingredient-fd-analysis-results

F-D Analysis results determine which ingredients to feature in the tested beauty product

 

Which quadrant an ingredient falls into determines how it can be treated for marketing purposes. This helps answer the question of which ingredient should be positioned as the “hero ingredient”, which ingredients should be featured, and which may hurt a product’s marketability.

health-beauth-product-ingredient-fd-analysis-interpretation

The F-D Ingredient Analysis is a standard component of the Cosmetics Assessment Standard (CAS) study, which assesses the appeal of new health and beauty products and provides actionable product improvement and marketing insights.

How to Test Your Product Idea Using Concept Validation Surveys

Getting early market feedback is crucial for consumer product development. While this is widely known, the different available methods can be confusing for inventors and marketers.

Few things compare with concept surveys for speed, validity (statistical power), and depth of results. The main purpose of this early-stage survey is to benchmark the appeal of a new product idea against similar alternatives that are already in the market. If the product scores higher than the alternatives, it’s a good sign of potential product viability. If not, the results will show where the concept is weak, and may suggest improvement ideas.

CAS-exerpt1

An excerpt from a new product concept survey report. The tested product’s viability metrics are compared against those of benchmark products. The study type shown is for testing the viability of new beauty products.

Various study configurations are common, but they all typically employ 200 or more respondents, are conducted through online questionnaires (which significantly improves speed and cost).

Respondent recruiting is an important issue, and targeting criteria will depend on the purpose and stage of the survey. A “mass-market” sample (which is representative of the general adult population) can help identify the product’s target market by reporting which segments have the greatest interest in buying the product.

demo-response1

Example demographic response to a new invention idea, used to help identify the target market.

If the target market is already determined, the survey sample can be recruited from that specific population (for example, “US women age 18 to 24”, or “dog owners age 50+ in Florida”). From that population, different product variations (“concepts”) can tested to determine which has the best sales metrics.

geographic

The purchase intent for a new product is displayed by region, indicating where the best region to launch the product may be.

Some early-stage developers choose to conduct their own informal surveys, which can help determine consumer preference or critical product flaws. Professional research can be a worthwhile investment because do-it-yourself surveys may not pass the Investor Test. If you conduct your own surveys, be sure to address these important issues:

  • Questionnaire design: it’s easy to write questions that are confusing, leading (causing bias), or can be interpreted in several ways. The manner and order in which you ask questions can also significantly affect the responses.
  • Benchmarking: if you learn 50% of respondents “like” your product, is that good or bad? Without a database of other results, or running benchmarking surveys, the results are inconclusive.
  • Sampling: finding respondents who represent your target market is always a challenge.

CO-exerpt

An excerpt from a new product concept selection survey. The results for one concept variation are shown, which would be compared to other variations also tested.

Using the “Investor Test” to Prove New Product Ideas

Inventors face many challenges, and perhaps the most serious is the issue of marketability. After all their invested time and effort, will they be able to raise funding for manufacturing? Will they be able to get retail distribution? Will anyone actually buy it?

This issue is known as concept validation, and there are two key components for product development:

  1. Technical Validation: Proving the invention is technically possible (that it will work properly)
  2. Market Validation: Proving that people will buy the product (in sufficient quantity, at the required price)

A characteristic of inventors is that they tend to like inventing, leading them to focus on technical validation. At some points, perhaps after perfecting their prototype, or receiving their first sample batch, they must address the second and larger challenge: proving people will buy it.

An easy way to know if you’re validating your product idea sufficiently is with the “Investor Test”. Ask yourself:

If I showed the results to an investor, would it give them the confidence to invest in my product?

This is a very relevant question because many inventors eventually find themselves asking that exact question.  A good invention validation method will be:

  • Quantifiable: instead of vague observations, results should be measurable (numeric).
  • Reproducible: you could run the test again, and get similar results.
  • Trustworthy: conducted by competent people, in an unbiased manner.

While asking family and friends what they think of your new invention is a good idea, it clearly fails the “Inventor Test” of concept validation:

  • It’s not quantifiable because the results are typically qualitative responses like “that’s a good idea, can I get it in blue?” Even if you attempt to measure their responses, the results won’t be statistically significant unless you survey many hundreds of friends.
  • It’s not reproducible because you can only observe the initial reaction of your friends and family once.
  • It’s not trustworthy, because your friends and family have inherent biases not present in typical consumers.

It’s naturally a good idea to validate your invention idea in multiple ways. This will give investors more confidence to fund your product, and give you more assurance that you’re on the right track.

Increasing Beauty Product Sales Using Claims

claims-impact-beauty-sales-infographic

A study was conducted in May 2016 by HIT Laboratories, revealing consumers may be up to 266% more likely to purchase a beauty product if subjective claims are added to its description.

A subjective claim is one that consumers can judge for themselves, such as if they think the product made their skin softer. This is contrasted with an objective claim, which usually requires scientific measurements of results (such as actual measurements of their skin’s softness using a device).

Beauty Claims Study Results

In the study, survey respondents were shown an “anti-wrinkle complex” cream and short description. Some respondents saw the description alone, while other respondents also saw subjective claim study results.

When asked about their likelihood to purchase the product, the group that saw the claims was 60% more interested in purchasing the product, and 266% more likely to pay the $29.95 product price.

The effect of claims on different types of beauty products is being tested by HIT Laboratories. New study results are available at http://hitlaboratories.com/reports

FTC Regulations and Claims

Beauty product claim regulations are generally set by the Federal Trade Commission, which advises that all claims must have competent and reliable scientific evidence to support them.

The required extent of testing depends on the strength of the claims and the impact they would have on consumers, among other factors. Furthermore, claims that suggest the product can prevent, diagnose, treat, mitigate, or cure any disease would effectively classify the product as a drug instead of a cosmetic according to FDA policy.

How to Substantiate Claims

Several U.S. companies including HIT Laboratories provide claim substantiation services. For subjective claims like the ones tested in the survey, the tested product is typically provided to between 20 and 50 subjects who use it for a specified period. Their results are measured or recorded, analyzed, and compiled into a final report. The claims that can be made in advertising are based on the final results.

This article is intended for informational purposes only and not for the purpose of providing legal advice.



How not to launch a product: A $4 Billion Marketing Lesson in 2 Minutes

When is a product launch a “sure thing”? How about when you’re the market leader, employ an army of marketers and designers, enchant the media, and invest four billion dollars?

Ford had every advantage, and the result was disaster. What went so wrong?

It was the mid-1950s, and Ford needed a new medium-priced model to round-out their line. They invested heavily in marketing research to determine what consumers wanted in a new car. They meticulously analyzed the competitive landscape. They designed genuine innovations that would later be copied by other manufacturers. In short, they did everything one would think sensible and prudent.

Yet the launch was a complete flop. Manufacturing was halted within three years — long before reaching break-even sales — and the “Edsel” brand became synonymous with monumental failure.

If they did such excellent planning, where did it go wrong? How can we avoid making similar mistakes with our own product launches?

1. Ford paid lip-service to their customers’ preferences, but disregarded them on key points. For example, they produced an incredible list of 6,000 name ideas ranked by consumer reactions and expert opinion, but top executives couldn’t pick a winner. The puzzling “Edsel” brand (a low-ranked name in their research) was chosen by the chairman of the board to break the debate. As John Brooks’s concluded in his 1969 essay on the topic,

“Although the Edsel was supposed to be advertised, and otherwise promoted, strictly on the basis of preferences expressed in polls, some old-fashioned snake-oil selling methods, intuitive rather than scientific, crept in.”

2. It’s hard to believe that in a $3 billion development budget ($250 million in mid-50’s), basic test marketing was never conducted. This can be done from a very early stage in the form of concept testing: showing a finished concept to the target market and getting feedback. Done quantitatively, several concept variations can be compared to determine the best one. In a later stage, consumers can try prototypes. Ford took the opposite approach: keeping their Edsels literally “under wraps” and hidden from public view until the grand unveiling.

edsel_1958

3. Watch people shop for as much as a toaster, and it becomes obvious that pricing is crucial. The Edsel’s pricing was confusing, overlapping with other product lines so consumers didn’t know where it was supposed to stand. Furthermore, the positioning was unclear: highlighting innovative features that could only be considered “premium”, while lacking features common to other premium cars.

4. For over a year the Edsel was slowly revealed to the public in what some called and “automotive striptease”. It was hyped through stunts and ads like no other car had been, so expectations were naturally high. But after release, the only sensible media story remaining was “does it live up to the hype?” With such an intense spotlight, minor problems typical of any new model became national headlines, fueling a devastating negative news cycle.

Key takeaways:

  1. Apply your marketing research at each stage of development and marketing.
  2. Test market early and often to avoid launching an “Edsel”.
  3. The consumers’ purchasing decisions consider the competition, so you should too: position clearly.
  4. Don’t build unrealistic expectations or over-hype your product: it invites piercing scrutiny.

 

Survey Shows Tim Cook Probably Right About 2-in-1 Apple Hybrids

On November 15, Cook told the Irish Independent, “We feel strongly that customers are not really looking for a converged Mac and iPad….Because what that would wind up doing, or what we’re worried would happen, is that neither experience would be as good as the customer wants. So we want to make the best tablet in the world and the best Mac in the world. And putting those two together would not achieve either. You’d begin to compromise in different ways.”

His comment made ripples in tech news, and answered a lingering question: will Apple attempt to merge their MacBook and iPad lines into some kind of hybrid product? Such a move would follow computing trends: according to IDC research analyst Jitesh Ubrani, “2-in-1s are the only reason we expect the overall tablet market to experience positive growth from 2016 onward.”

In the week following Cook’s statement, research firm Hit Laboratories conducted an internet survey of 512 US consumers to investigate two questions that arise from his statement:

  1. Do Apple customers want to buy a hybrid device?
  2. Would a hybrid be the best experience for those that want one?

 

31% of Apple customers want to buy a 2-in-1 hybrid

Although Microsoft’s Surface and other Windows hybrids have demonstrated a market for 2-in-1 devices, is it possible that Apple customers have different needs and desires? It doesn’t seem so: among the respondents (of which 47% were Apple customers) there was no statistically significant difference between the groups when asked “what are you most interested in purchasing as your next primary computing device?”

 

Remainder of responses were “I don’t know” and “None of the above.” “Apple customers” were respondents who owned at least one device running the iOS or OS X operating systems. “Primary computing device” was defined to respondents as “your ‘main device’, with a screen 10 inches or larger, which you would use for anything more than simple tasks.”

 

Hybrids would not provide the best experience for everyone

The second question is whether a 2-in-1 hybrid would actually deliver a great experience for those who want one. As Cook implied, designing a hybrid device necessitates design compromises which cannot yet be resolved by engineering. For example, a device cannot have both a large screen (possibly a valued attribute in a laptop), and a small portable screen (maybe better for a tablet).

We examined ten different attributes and found that among people who wanted a hybrid as their next device, their preferences were potentially incompatible with what a hybrid would actually deliver.

 

Larger screen vs. smaller portable screen

On Amazon.com, the average laptop screen size is 14.5 inches, and the average tablet size is 7.3 inches. It stands to reason that a hybrid with an intermediate screen size (around 11 to 12 inches) would be too big when used as a tablet, and too small when used as a laptop. The below chart shows that among Apple customers who want to buy a hybrid, there’s a broad range of preferences which couldn’t be satisfied by any one device.

30% prefer a "smaller" and 59% prefer a "larger" screen size.

30% prefer a “smaller” and 59% prefer a “larger” screen size.

Touchscreen vs. Trackpad

When Apple customers were asked what they’d prefer in a hybrid, only 11 percent wanted a touchscreen without trackpad. Most respondents wanted some degree of trackpad support to complement the touch input, which could be interpreted as wanting a small trackpad. It’s interesting to note that the iPad Pro with Smart Keyboard, the closest thing Apple has to a 2-in-1 hybrid, has no trackpad at all. Fortunately, a trackpad should be easy for Apple to add to any future hybrid design: Microsoft’s Surface tablet has a small trackpad, and the Surface Book hybrid has a large trackpad.

30% tend toward a trackpad, and 55% toward a touchscreen

Performance vs. Battery life

While leading laptops and tablets have similar battery life when being actively used, laptops tend to have stronger processors, and tablets can be used for days in connected standby mode. A 2-in-1 would need both high performance and great battery life to satisfy demand, as seen below.

58% prefer faster a processor; 35% longer battery life.
58% prefer faster a processor; 35% longer battery life.

Tim Cook may be right: maybe Apple customers are not really looking for a converged Mac and iPad, but they are clearly interested in buying a hybrid device of some kind. The next question is if the iPad Pro and Smart Keyboard combination, with its relatively small screen and no trackpad, will fill that need.

Recent Successes

We try to make research simple, but the easiest way to explain our services is with examples. Read on for brief examples of how our services have helped clients.

InstaHit

Does your product have “hit” potential? Rapidly test your idea with US consumers and compare its performance against other successful products. The results include how much consumers might pay, which offers are better, what their objections are, how they would improve it, and more.

Client story: A small team of inventors used InstaHit to test their product idea as a DRTV item. It scored low on the Usefulness metric, leading them to realize that while the produce was great for some consumers, it didn’t address a need for most. Through additional research they better identified their real target market and optimized their feature set and value proposition.

Conceptualyzer

Optimize your product and marketing. Conceptualyzer provides a comprehensive analysis of consumer perception, what they would change to make it more appealing, and giving you specific ideas on how to craft your presentation.

Client story: A cosmetic distributor used Conceptualyzer to create an upcoming DRTV campaign. The results helped them make crucial decisions on product packaging, key features, and the offer. They also learned what demonstrations and testimonials they should focus on to appeal to their target market. In subsequent campaigns they’ve looked back to the report when making key decisions.

Pitchalyzer

Optimize your video presentation. Learn what consumers think of your presenter, your demonstrations, testimonials, and offer. You’ll also get feedback on the product itself, and what consumers really want to see.

Client story: A cosmetic brand tested their under-performing long-form (“infomercial”) and learned that some testimonials were alienating consumers and damaging credibility. They also discovered a simple way to increase appeal, and found the best of four new continuity offers. They are preparing a new campaign based on the results.

 

More Information with the New InstaHit

The InstaHit™ has always been our standard for assessing new direct response products. Now we’ve added more features to help marketers launch better campaigns. We believe the more information you have about your product and your market, the more prepared you will be to find your audience, focus your message, and counter objections.

New features include:

  • Compare offers. Test two different offers to find the better one.
  • More powerful segmentation. See who likes your product the most — by age, gender, marital status, education, income, children, US region, and ethnicity. This helps you identify your target market and plan ways to reach them.
  • Name suggestions. Learn what consumers think of your product’s name, and see their unique name ideas.
  • Improvement suggestions. See what changes would make your product more appealing to consumers.
  • More consumers. We doubled the InstaHit sample size to 400 US consumers, giving you more detailed responses and greater statistical confidence.
  • Safety metric. In other research we’ve found that safety is a common objection for consumer products that interface with existing property (for example, cleaning products), or that are used by people (for example, beauty products). Now you can see how concerned consumers are about your product, compared with other successful products.

Our InstaHit reports still include the market research essentials: Our InstaHit Score, viability metrics, preferred purchasing methods, main objections, and price perception.