Follow
Ever wonder how big retailers such as Sears and Wal-Mart know if they can raise prices on an item and you’ll still buy it? Or how McDonald’s knows which new sandwiches they can introduce in a given market?
Before the world’s best companies decide to invest in a new product, launch an advertising initiative or roll out revised pricing models, they generally test their changes first on carefully selected portions of their customer base. These types of business experiments allow companies to know how their customers will react to initiatives before they risk rolling them out to the masses.
Business Experiments Use the Scientific Method
Business experiments work in almost the same way that other scientific experiments work, with one or two exceptions.
First, a manager starts with a hypothesis. For example, “raising the price of our toothpaste from $2.00 per tube to $2.50 per tube won’t reduce our sales revenue.” Next, she designs a carefully controlled experiment to test that change. This will typically require that she work with a carefully selected set of stores or clients, change only the price of the item and nothing else in those stores, and then keep the bulk of stores in the system unchanged. Finally, she’ll compare the results of the price change in the carefully monitored test group with the rest of the company’s sales of toothpaste to determine if the price change is a good decision or not.
If she has set up a properly controlled experiment with a well-defined hypothesis, test group and control group, then the results of the test should be generalizable to the rest of the company’s stores and increasing the price should lead to more revenue.
Business Experiments Aren’t Just for Big Companies
The idea of carefully planning and testing business decisions works for small businesses as well as big ones. That said, larger organizations do have an advantage over smaller ones when it comes to designing and running business experiments.
The hard rule of statistics is that the larger the sample upon which you test your ideas, the more you can rely on those results. Companies with large numbers of stores, products and customers to work with have the luxury of being able to test their ideas on larger samples and as such can typically create more accurate predictions than smaller businesses.
But even though smaller companies have fewer places to test their ideas, they can still learn valuable lessons through controlled rollout and testing of new ideas. For example, if a small business wishes to change their pricing structure, they might consider doing so for two or three items before adjusting the entire catalog. Or if an organization purchases online advertising, they might consider testing two versions of the same ad for limited amounts of time before deciding which to push out to all of their potential customer base.
What Decisions Can Business Experiments Help Me Make?
In general, business experiments work best when you’re trying to test a specific decision and determine its effectiveness.
Here are a few examples of questions you can answer with carefully crafted business experiments:
- Which ad campaign will generate the most leads?
- What’s the optimal price for our new product?
- What compensation plan will optimize employee performance?
- How many of these products can we expect to sell?
- If we change this manufacturing process, how much output can we expect?
DataClear is a Baton Rouge-based data analytics consulting firm. Contact Us for a free 30-minute consultation and discover how your company can profit from data-driven decision making using tools that won’t break your budget.