Pricing. Warren Buffett once called it “the single most important decision in evaluating a business.” However, brand manufacturers — even those quite adept at pricing in their traditional business channels — generally find direct-to-consumer pricing difficult. What makes it so challenging?
- More data. Once shielded by their channel partners, who are understandably reluctant to share data with their vendors, brand manufacturers going direct-to-consumer suddenly find themselves swimming in data. For example, the sales velocity of a single product — and how that velocity changes in response to discounts, price increases, or other factors — can be measured in real time. Organizing and making sense of this data can be quite time-consuming.
- Greater freedom. In addition to being able to gather detailed data on a minute-by-minute basis, eCommerce suddenly affords brands flexibility to make changes to their business at the same frequency. Newcomers to eCommerce often struggle to simultaneously optimize their business and avoid overreacting to short-term fluctuations.
- New competitors. eCommerce has reduced the barriers to entry present in more traditional channels, creating opportunities for startup, “digitally native” brands to enter markets historically dominated by a smaller number of large brand manufacturers. In making the decision to go DTC, brand manufacturers become exposed to competition that they were previously unaware of, often at different price points and with different pricing behaviors than their traditional competitors. One Ally client, a furniture manufacturer who considered themselves to have only 2-3 real competitors, were shocked to find that their category had over 9,000 products sold across 30+ brands on Amazon. Most of these clients sold their products at a 30-50% discount to traditional competitors. Needless to say that the competition was much fiercer than in the client’s traditional channels.
- New conflict. Many of a brand’s existing channel partners have an online presence and are sensitive to erosion in their business. Not surprisingly, pricing is a particularly sensitive topic for them. Implementing and enforcing a MAP policy requires additional effort for a brand manufacturer, but it can help allay channel partners concerns by providing a common set of guidelines for all online sellers (something from which the manufacturer itself will also benefit.).
While eCommerce pricing can be tricky, there are clear payoffs associated with getting it right. One Ally furniture client strategically reduced their prices in a category by 10% and saw their sales in that category double. Another Ally client in the consumer electronics space faced a manufacturing shortage for one of their top selling SKUs. By strategically raising the price on the products that included this SKU, they were able to maximize the margins and reduce stock-outs, resulting in a 15% increase in their margins.
Here are three tips to help you stay competitive, maintain strong profit margins, and deliver great value to your customers.
1. Evaluate your pricing holistically
Making pricing decisions requires viewing your products’ price through three lenses: relative to the competitive set, relative to channel partners, and relative to your costs. Without a comprehensive approach that considers each of these three factors, your pricing will be off and the profit margin will suffer. Keep in mind that:
- You may need to take a more comprehensive view of your competitors than you have historically. Evaluating search results and marketplaces such as Amazon, eBay, Jet or Reverb can be a great way of developing a broader view of the market.
- The economics for eCommerce are quite different than for traditional channels. Factors such as returns, fraud, and outbound shipping must be considered.
2. Design price tests carefully and understand what is (and what is not) in your control
Price testing is best done thoughtfully, otherwise, you may find yourself unable to draw meaningful conclusions. Some critical questions to ask before you begin are:
- What exactly am I testing and how will I know if my test has been successful? Having a clear hypothesis at the outset of a price test (e.g., the margin lift caused by by a 10% price increase on Product A will offset any volume decline and thus will result in better overall margins) will help clarify expectations and tease out considerations (e.g., accounting for product cannibalization).
- What do I need to measure and how much data do I need to validate that it’s successful? The volume of data needed determines how long you need to test. Selecting the right variables is also critical, as sometimes these must be adjusted to account for time, mix or other factors.
- What outside factors might influence my results? External factors such as competitive pricing moves, changes in marketing spend, seasonality, and inventory issues can all impact pricing results.
3. Constantly optimize your pricing
eCommerce is too dynamic for a “set it and forget it” mindset on pricing. Brand manufacturers should constantly look to evaluate their pricing, learn what works, and make improvements. Developing a calendar outlining price testing schedules can systematize price testing in the organization.
Want additional insights on pricing in DTC? Check out our resources page for more helpful info or get in touch if you have more specific questions. We’re happy to help.