Why you should experiment with pricing

Love him or hate him, you do have to give Ruslan Kogan credit for one thing: he has the appetite to experiment with his pricing that many leading companies lack.

In mid-June, Kogan decided to apply a 6.8% “Internet Explorer Tax” on anyone who buys electronics products off his website using Internet Explorer 7 (IE7). In his defence, he argued that optimising websites for IE7 involved additional coding costs, which are not incurred when optimising websites for browsers such as Safari or Google’s Chrome.

The IE7 tax may achieve several results. It will raise awareness of the costs associated with optimising websites for IE7. It may help recoup the additional costs associated with the process, modify customers’ behavior, and encourage them to switch to another browser. Kogan may also get a feel for the price sensitivity of his customers.

But it’s the experimental aspect of this initiative that intrigues me. Why don’t more companies run pricing experiments?

Pricing experiments had a dirty name in the late 1990s and early noughties. Coca Cola, to its detriment, incurred a huge consumer backlash to its plans to develop temperature sensitive vending machines that would charge customers more for a Coke on a hot day.

Likewise, Amazon had to refund 6,896 customers an average of $3 when they discovered the company had tested price discounts of 30%, 35% and 40% on them when purchasing an identical product.

Awhile back, the CEO of a bakery chain told me he was interested in experimenting with the price of doughnuts. When he expand on the details, it was clear he wasn’t planning an experiment at all: he was planning to drop prices on all his doughnuts in all his stores… hardly a pricing experiment!

The key to pricing experiments is not to do them on all products, or in all stores, all markets or across an entire network. In 2005, Qantas discounted off-peak business class fares on flights between Melbourne, Sydney, Brisbane, Adelaide, Canberra and Hobart. The official line from Qantas was that they were “experimenting to quantify price elasticity” (or words to that effect). The pending launch of Ozjet (remember them?) may have also been a factor.

Think small when it comes to pricing experiments. Quarantine the market where you are running the price experiment, be open and transparent with customers, and have a control case against which you can measure and compare the results of your pricing experiments.

Kogan knows there is no such thing as a pricing laboratory to experiment with pricing: there’s only the real world. Unless, of course, the IE7 tax is all just one big publicity stunt?