Skip to content

As a product manager or product owner how do you validate which pricing model works best for your product?

product-management

For years digital marketing has used A/B testing to test landing pages, newsletters, Email, Ads and more successfully to capture how users react and convert

Can A/B testing be used to test pricing models?

Assume currently you have a single pricing model and you have an hypothesis that a tiered pricing model (Basic, Standard, Premium) will increase the average revenue per user (ARPU) by 20% compared to the current single pricing model.

💎 Metrics to watch:
1. Average revenue per user (ARPU) 💴
2. Conversion Rate 👯
3. Churn Rate – Customers who cancel 🤷‍♂️
4. Customers lifetime value (CLTV) 💅

💎 Segment Customers
1. Control Group: Users that see the current pricing model (A)
2. Control Group: Users that see the tiered pricing model (B)

💎 Design the A/B Test
1. User groups are the same customer segment to remove bias.
2. Determine the sample size for each group to ensure statistical significance. Use a sample size calculator to detect a meaningful difference in ARPU with a 95% confidence level.

💎 Implement and Run the Test
1. Show different pricing pages
2. Monitor over a long period (e.g., 30 days) to collect sufficient data.

💎 Analyze the data
Compare the ARPU, conversion rates, churn rates, and CLTV between the control and test groups.
Example data:
Control Group: ARPU: $20, Conversion Rate: 5%, Churn Rate: 2%, CLTV:$100
Test Group: ARPU: $24, Conversion Rate: 6%, Churn Rate: 1.5%, CLTV: $120

Based on the analysis if the ARPU and other metrics show significant improvements then it validates the hypothesis that the tiered pricing is better.

Have you used A/B testing in product management?
Share your example in the comments field below

If you like to learn more about planning hypothesis and validating business ideas join our Advanced Certified Scrum Product Owner (A-CSPO) workshop delivered live online over four half days. Link in the comments below.

Join the conversation

Your email address will not be published. Required fields are marked *