Industry
March 16, 2021

7 Signs It’s Time to Refresh Your Pricing Strategy

7 Signs It’s Time to Refresh Your Pricing Strategy
The price is wrong?

After a record-breaking 2020 that accelerated the ecommerce growth curve by two years worldwide, DTC brands are hungry and eager to keep up the pace. It’s why many existing merchants are launching new product categories, exploring the potential benefits of podcast and TikTok ads, and optimizing their websites to make it easier for consumers to find (and buy!) their products.

Those are all worthwhile investments. But if you spend too much time ramping up your social presence or researching faster fulfillment options, you may be missing another key focus area, one that’s 100% within your control—your overall pricing strategy.

Why pricing goes bad

It’s OK to admit that you haven’t put a lot of thought into pricing over the last few months—or maybe ever. Here’s a little secret: Most DTC brands don’t. Instead, they rely on gut.Or they pick what they perceive as a “tried and true” pricing strategy. Then They set it and forget it, without ever realizing they may be costing themselves potential revenue and profit.

Even more concerning, many merchants don’t understand the ways their current pricing strategy constantly lets them down. After all, you won’t get an alert on your Shopify interface that tells you your key products are underpriced. You won’t even see the warning signs inGoogle Analytics, because a high bounce rate could be the sign of overpriced products or countless other issues.

Making your product pricing work for you means knowing how to spot the not-so-obvious red flags that your products may be underpriced or overpriced. To help you gain confidence in your pricing approach, let’s explore seven subtle signs you may need a pricing strategy refresh.

Sign #1: You picked a ‘proven pricing model.’

Google “ecommerce pricing strategies” and you’ll get numerous lists of so-called can’t-mis strategies—cost-plus pricing, competition-based pricing, value-based pricing. They all provide seemingly helpful information.

But here’s what they’re not telling you: most (if not all) of these strategies are wildly outdated. They Harken back to a time when merchants didn’t have access to real-time data. A time when clothing sat on a rack in a department store for months with no changes in price based on demand or seasonality. A time when “comparison shopping”for consumers met jumping in a car and driving 30 minutes to another store. Even Worse, these “proven strategies” completely ignore the way customers view prices today.

Take cost-plus pricing—a“strategy” focused on adding an across-the-board markup based on a fixed percentage—asan example. Let’s say you decided to add a 25% markup to all product prices. Maybe It’s because that’s the amount you calculate you’ll need based on yourcosts—staff, inventory, supplies. Maybe it’s a margin you needed in a prior business. Either way, the markup you determine is most likely based on your needs,and not your customer’s needs.

You know more about your products—and your business—than your customers do. The only thing your customer cares about when they look at price is this: How much value does your product deliver for the cost? Applying a static markup based on an arbitrary profit margin is illogical in an ecommerce world where consumer need and demand rule the market.

Cost-plus pricing is static, impersonal, and completely blind to changing factors like inventory, sales,discount patterns, and website traffic patterns. It may have worked in a world before real-time data. It no longer works today.

 Sign #2: You focused on your competitors’ pricing.

On the surface, this also seems like a rock-solid strategy. You’ve added a product line. It’s similar to two or three others on the market (but yours is better, of course). So you research the DTC shops that make products like yours. You see how they market their products, how they price them, how they feature them. Then you set your price accordingly. Maybe, in a quest to build market share, you price it below the competition as a penetration pricing strategy, which can be a sound short-term approach.

However, when you set your product pricing based on your competitors’ pricing, you’re once again losing your focus on your customers. Yes, your customers may compare prices. But your customers aren’t razor-focused on your customers like you are. In fact, your customers may not even know who your competitors are. They may not know similar products exist in the market. They probably don’t care. At their moment of purchase, your customers only care about how your product can help them.

Sign #3: You’ve neglected pricing

We talk to many DTC founder sand ecommerce directors. As a rule, they all know the role data plays in almost every part of their business. But when we ask about pricing, they tell us they didn’t use data at all. They didn’t test their pricing. Some went off of gut feeling—they saw a price that just felt good to them.

Now, we’re all for trusting your gut when circumstances call for it. After all, all great DTC brands start with a great idea, often based on a gut feeling that the products you’re selling will solve your customers’ needs in the best way possible. But when it comes to pricing, using your gut alone—or using the set-it-and-forget-it approach and ignoring your prices completely—could cost you plenty of potential revenue and profit.

Another potential sign of neglect: merchants who set their product pricing strategy 10 years ago and haven’t updated it since. The more rigid your thinking on price—and the more outdated your pricing concepts—the more likely it is that your pricing strategy needs a fresh set of eyes.

Sign #4: Your sales spike(or don’t spike) during a sale.

Whether its Black Friday,Cyber Monday, or another holiday, your customers may expect discounts, andrunning seasonal promotions often gives DTC brands a nice boost. But if your promotion results are too good, or if they deliver no discernible increase in sales whatsoever, it’s an indicator that your product pricing may need some tweaking.

Let’s say your sales are bringing in two-thirds of your revenue. That’s a good thing, right? Not quite.If your volume spikes 10X during a sale, it’s clear your regular prices are probably too high. Meanwhile, if you run a sale and get only a tiny volume increase, it’s a safe bet your products are underpriced.

Sign #5: Your abandoned cart recovery campaigns are super-successful.

Much like Sign #4 above, this sign seems like a good thing on the surface. Let’s say you noticed a concerning trend in your cart abandonment rate. Because that rate includes many factors (and price is just one of them), you’re not sure of the exact reason why it’s going up. So you start an abandoned cart recovery campaign, sending promo codes with discounts to customers who have left your site with items in their carts. And those campaigns deliver great results.

but while successful abandoned cart recovery campaigns bring in business, they don’t get to the root cause of why your customers abandoned their checkout in the first place. Instead,these campaigns delay revenue, because you may be waiting two months to convert a customer who could’ve converted that day if your product’s price was right.

Sign #6: Your price doesn’t reflect your true brand position.

You know your brand inside and out. But improper pricing may lead consumers to develop the wrong impression about your brand—one far away from what you intended.

For example, let’s say you set too low of a price—maybe similar to what shoppers might find on eBay or on Amazon or Alibaba’s wholesale channels. That could tell consumers that you’re a wholesaler as well, which will undermine the value of your product.

Now, let’s say your brand has a low SKU count and prices its products too high. That could send a message to consumers that you’re a luxury brand.

If you spot either of these trends, consider changing your product pricing strategy sooner than later so you can protect your brand image and give your customers a more appropriate brand experience.

Sign #7: Your website price is higher than your Amazon price.

While many of the signs you need a pricing refresh are subtle, this one isn’t. As a rule, you want people to buy your products from your website for a variety of reasons. Doing so allows you to connect your customer’s data, which you can then use to drive repeat business with personalized offers. It also allows you to offer your customers cross-sells and upsells. In short, you’ll make a deeper and better connection with your shoppers when selling on your own site. And, of course,when someone buys from your site, you won’t have to pay Amazon’s referral fees. 

That’s why, if you’re offering your products on both your own website and Amazon, your DTC’s website prices should be lower than your Amazon prices. This may help draw Amazon Customers off of their channel and onto your channel. In contrast, if a shoppersees a lower price for your product on Amazon, the odds of them crossing over to your website are incredibly low.

Why does all this pricing stuff matter, anyway?

It’s a good question, and it’s one we get from DTC founders and ecommerce directors quite often. To find the answer, let’s do the math.

Let’s say you’re using acost-plus pricing strategy. You’ve already determined that you need a 60%profit margin, and you’ve applied a markup on your products that helps you achieve that figure. Goal achieved. But let’s say you do some price modeling, and the data shows you that if you adjusted your markup to achieve a 55% profit margin, you could double the amount of sales. Suddenly, the benefits of optimized data-based pricing strategies become crystal clear.

Data-driven pricing brings another benefit. It offers a consumer-centric view. It helps you learn how many people will buy your product at X cost or Y cost. It helps you understand why consumers buy during promotions and sales. It helps you see and understand your demand curve so your products—and your pricing—hit just the right mark at exactly the right time. And it helps you create more personalized experience in real time.

But how do I craft a pricing strategy if my products are unique?

Pricing gets trickier if you have one-of-a-kind products, but it’s not impossible. Take Smoke Cartel as an example. They make unique, handmade products with no UPCs. They have no direct competitors and fewer than a dozen substitutes. They took their best shot at pricing on their own—and did fairly well.

Then, to optimize their product pricing, they installed Pricestack’s Shopify app and connected Google Analytics. Our AI automatically analyzed their order and visitor data and suggested prices that maximized revenue. As a result, they achieved 175% revenue growth per product view in just seven weeks using their own website data!

What pricing metrics should I look at?

Profit, revenue, and customer lifetime value (CLV) are all good metrics for DTC leaders to review when it comes to pricing. But in our mind, the two best are profit per website visitor(PPV) or revenue per website visitor (RPV). They’re both a bit more nuanced,rolling up margin, price, and conversion rate into one package that offers amore holistic view.

To keep things simple, let’s say you have 1,000 website visitors on June 1 and 10 of them buy a product for 50 cents each. Your RPV for that day is 50 cents. When you calculate PPV or RPV across all products, it gives you information you can use to see whether lowering the price on one set of products and raising it on another set of products might help you come out ahead.

Some Closing Thoughts

There’s no shame in admitting your pricing strategy needs a refresh. It’s an area that’s easily overlooked because so many other areas of your DTC brand—from marketing to fulfillment to customer experience—demand lots of attention, too. 

If you notice any of the seven signs we listed above, it’s time to learn more about how pricing can help drive even better results. Our recommendation: Start by learning more about the way your customers look at prices. This blog post offers insights we think you’ll find helpful.

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