Price Increase Test

Why this matters for your decision

A price increase pays off when the additional revenue per customer outweighs the loss of customers. Whether that is the case depends on how strongly demand reacts to the new price. This reaction differs by category, brand and price level. A meta-analysis of 81 studies finds an average price elasticity of minus 2.62 (Bijmolt, van Heerde & Pieters 2005). For your own decision, however, what counts is the reaction to exactly this offer.

Perception also plays a role: an increase justified by higher costs is more likely to be seen as fair than one that exploits a shortage (Kahneman, Knetsch & Thaler 1986). How an increase is justified and communicated can therefore itself be a variable.

Once implemented, an increase can hardly be reversed without losing credibility. That is why the moment before implementation is the right time for evidence.

How to test a price increase

The current price runs as a comparison variant, with one or more increase levels alongside it. Offer, page, target group and channel remain identical, only the price changes. Each person sees exactly one price.

In Horizon's behavioural test, the variants run in parallel with real people in their usual online environment, without a panel and without incentives. Purchase intent is measured for each price level. From the ratio between the current and the new price, together with your own sales data, you can estimate what the increase costs in volume and brings in revenue.

An increase affects existing customers differently from new customers. The behavioural test measures the reaction of people who see the offer for the first time. For the question of how many existing customers cancel, additional data is needed.

Example

An energy supplier wants to raise the monthly base price of an electricity tariff from €11.90 to €13.90 or €14.90. In the behavioural test, measured sign-up intent at €13.90 is almost at the level of the current price, while at €14.90 it falls by around a quarter.

Calculated with the company's own margins, the €13.90 level holds. The €14.90 level brings more per customer, but costs considerable demand.

How it differs

A price test generally compares several prices, for example for a new product. When testing a price increase, there is always an existing price as a reference point. Price elasticity is the metric that follows from such a comparison: how strongly demand reacts to the change.

A pricing survey can give indications of which increase is perceived as acceptable. It does not show whether people still sign up at that price.

Limitations

The behavioural test reflects the situation of a new prospect. It does not measure cancellations among existing customers, competitor reactions or long-term brand effects. If the levels are very close together, large samples are needed to detect a difference reliably.

For products bought mainly on the shelf next to competitors, or for very cheap items, an offer page is not the right setting. There, retail data or shelf tests are more meaningful.