Let’s start with a pop quiz.
Which of these direct-to-consumer (DTC) darlings figured out the profitability game the fastest?
While Wayfair, Casper and Chewy faced profitability problems for years, Rothy’s reached profitability in its first year of business (2015) and has stayed that way.
That’s important, because profitability is the most important metric for emerging DTC brands. After all, unless you’re flush with VC cash, you can’t grow without having profits to reinvest in the business. Yet achieving profitability is so tricky, Retail Dive lists profitability struggles as one of its top 8 DTC Trends to Watch in 2021.
Can pricing strategy = DTC profitability?
While many factors account for a DTC brand’s profitability, an optimized pricing strategy is a big one. That’s because pricing touches on every stage of your funnel. Your prices affect:
- Your conversion rate (the percentage of visitors who will place an order)
- How valuable those orders will be
- Which products—and how many products—your visitors will buy
- Your costs (more orders on lower-margin products = higher costs, and vice versa)
The best pricing strategy accounts for all these things. It also considers your customer acquisition costs (CAC), a line item with which nearly all DTC brands struggle. From 2017-18, CACs on Facebook and Instagram tripled. Casper alone spent 73% of its gross profit in 2020 on sales and marketing.
Four tips to help DTC brands win the profit game
We like to help DTC founders and ecommerce directors make pricing easy so they can focus on other parts of their profitability puzzle. Four tips to get you started:
1. Look beyond individual product pricing.
An ideal pricing strategy should drive average order value (AOV) at the cart level instead of the product level. Data can help you determine how small price adjustments upwards and downwards for complementary products can boost overall profitability.
For example, let’s say you sell custom bedding. You notice a spike in demand for a particular type of bedsheets. Your data says 45% of customers who are interested in that popular sheet set also buy one of your higher-end pillows. Now, let’s say your margins are higher on pillows than sheet sets. That gives you the freedom to offer a promotion on sheet sets. While you may make 5% less on each sheet set purchase during the promo, you may drive 20% more pillow purchases, creating higher AOV and profit per customer.
2. Take a deep dive into customer behavior.
The more you know about the psychology that drives your highest-value shoppers, the more you can craft strategies that will increase AOV and drive profitability.
For example, let’s say you’re a DTC fashion brand. You have a popular shirt available in five different colors, and 37% of shoppers buy two shirts per order. You might assume that if you lower the price, your high-value shoppers will buy three shirts per order, increasing your volume and your bottom line. And that might be true. But what about the opposite—could conversion rates remain unchanged (or maybe even grow) if you raised the price of your most popular shirt? If so, then lowering the price was a very costly move. You’ll only know the answers if you fully understand your shoppers’ behaviors.
3. Say so-long to static profit margins.
Profit margins without conversion rates are useless. You may aim for a 50% margin on all your products, but pricing with just that data ignores conversion rates, return rates, AOV and customer lifetime value (CLV). Today’s customer buying habits change quickly. We believe continuously monitoring prices will help you find improvement opportunities and increase profits, something static profit margins simply can’t do.
4. Optimize your Facebook ads for conversion value.
Instead of targeting people likely to make the highest number of orders on your website, target those who are most likely to spend the most money and potentially pay higher prices per visit. This seemingly subtle adjustment helps you craft a social strategy that creates profitability by finding people who convert frequently with high cart values. To learn more, read up on how forward-thinking strategies affect Facebook ads.
Some Closing Thoughts
We don’t pretend to know the secret to Rothy’s seemingly instant profitability, but we do know a strong link exists between pricing strategy and DTC profitability.
If you want a few more helpful hints on how to make your product pricing more data-driven, check out this blog post. Or, if you’re ready to learn more about how Pricestack helps DTC brands solve the profitability challenge, learn how Walkee Paws increased their profit-per-shopper by 71.2% with our free Shopify app.