pricing strategies for online merchants

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MonCon EAST | May 18–20, 2012 #MonCon #MonCon Strategies to Grow Your Ecommerce Business Casey Carey VP Marketing, Monsoon Commerce [email protected] @caseycarey

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Page 1: Pricing Strategies for Online Merchants

MonCon EAST | May 18–20, 2012

#MonCon#MonCon

Leveraging Pricing Strategies to Grow Your Ecommerce

Business

Casey CareyVP Marketing, Monsoon [email protected]

@caseycarey

Page 2: Pricing Strategies for Online Merchants

Why should you strategically leverage pricing?

Pricing economics and the role of irrationalityMost common pricing strategies used by ecommerce merchantsA framework for applying pricing strategies to your businessLeveraging pricing engines to execute your pricing strategies

Page 3: Pricing Strategies for Online Merchants

let’s take a look atTHE IMPORTANCE OF PRICING

Page 4: Pricing Strategies for Online Merchants

PRICING IS, WITHOUT QUESTION,ONE OF YOUR MOST IMPORTANT

STRATEGIC LEVERS.

WHEN PROPERLY APPLIED, PRICING STRATEGY CAN SIGNIFICANTLY IMPACT

THE GROWTH, PROFITABILITY, AND SUSTAINABILITY OF YOUR BUSINESS.

Page 5: Pricing Strategies for Online Merchants

What is YourPricing Strategy?

Page 6: Pricing Strategies for Online Merchants

What is the Best Pricing Strategy?

Page 7: Pricing Strategies for Online Merchants

A Set of Strategies, that Over Time, Allow You to Make the MOST

Money Possible!

Page 8: Pricing Strategies for Online Merchants

successful pricing strategy is aFUNCTION OF FOUR KEY ELEMENTS

Price

QuantityAvailable

Demand

Velocity

Page 9: Pricing Strategies for Online Merchants

markets are seldom in aSTATE OF EQUILIBRIUM

Equilibrium is upset if:• Supply changes• Demand changes• Price changes

When these events occur, the curves are redrawn to reflect the new reality.

There is also a velocity component, i.e. how fast are the changes occurring?

Page 10: Pricing Strategies for Online Merchants

MonCon EAST | May 18–20, 2012

#MonCon#MonCon

Why should you strategically leverage pricing?

The economics of pricing and the role of irrationalityMost common pricing strategies used by merchantsA framework for applying pricing strategies to your businessLeveraging pricing engines to execute your pricing strategies

Page 11: Pricing Strategies for Online Merchants

How Much Money do You Make on a

Product or Inventory Group?

Page 12: Pricing Strategies for Online Merchants

start by calculatingLANDED PRODUCT COST (COGS)

LandedProduct

Cost

Product cost

= Total Landed Cost+ Shipping+ Customs+ Risk

+ Overhead

Shipping: Costs associated with crating, packing, handling, and freightCustoms: Duties, taxes, tariffs, VAT, brokers fees, harbor feesRisk: Compliance, quality, safety stockOverhead: Purchasing staff, due diligence cost, travel, currency fees

Page 13: Pricing Strategies for Online Merchants

then calculateSHIPPING & HANDLING COST

Picking & Packing

= Shipping & Handling Cost

+ Shipping

+ Carrying

Picking and Packing: Costs associated with picking, packing, and handling ordersShipping: Out-bound shipping and surcharge feesCarrying: Facilities and insurance

S&HCost

Page 14: Pricing Strategies for Online Merchants

then calculateSALES & MARKETING EXPENSE

Sales Commissions

= Sales & Marketing Expense+ Marketing

Sales Commissions: Costs associated with marketplaces, affiliates, CSEs, and other CPA servicesMarketing: Paid search, advertising, email marketing, etc.

Sales & Mktg

Page 15: Pricing Strategies for Online Merchants

and finally, calculateOVERHEAD EXPENSE

Office Expenses

= Overhead+ Administrative+ Miscellaneous

+ Financing

Office Expenses: Office space, rent, insurance, suppliesAdministrative: Indirect labor and management salariesMiscellaneous: Other indirect expensesFinancing: Interest and other finance charges

Over-head

Page 16: Pricing Strategies for Online Merchants

understand yourECONOMICS OF PRICING

LandedProduct

Cost

S&H

Sales & Mktg

Over-head

Net Profit (free cash)

Sales

Contribution

Break-Even

Page 18: Pricing Strategies for Online Merchants

thenANSWER THESE QUESTIONS

What is my base price? This is your initial target price

What is my price floor? The lowest price I will sell it for

What is my price ceiling? The highest price I will sell it for

Is there a MSRP? This might create a price anchor point

Are there any price constraints? MAP, contractual, regulatory

Page 19: Pricing Strategies for Online Merchants

For every purchase, the consumer computes the relative net benefit of the choices:1. Product benefits (pleasure points)

• Size• Softness• Brand• Style• Quality

2. Price (displeasure points)

3. Intangible benefits (mitigate potential displeasure points)• Risk• Service• Timeframe

economists like to talk aboutRATIONAL ECONOMIC THEORY

Page 20: Pricing Strategies for Online Merchants

but often, purchase behavior is…HIGHLY IRRATIONAL

Page 21: Pricing Strategies for Online Merchants

irrationalityTHE LAW OF RELATIVITY

Which middle circle is larger?

Page 22: Pricing Strategies for Online Merchants

Economist.com subscription – US $59.00One-year subscription to Economist.comIncludes online access to all articles fromThe Economist since 1997.

Print and online subscription – US $125.00One-year subscription to the print editionThe Economist and online access to allarticles from The Economist since 1997.

Page 23: Pricing Strategies for Online Merchants

Combo

Online Only

32%

68%

Source: Predictably Irrational, 2010.

Economist.com subscription – US $59.00One-year subscription to Economist.comIncludes online access to all articles fromThe Economist since 1997.

Print and online subscription – US $125.00One-year subscription to the print editionThe Economist and online access to allarticles from The Economist since 1997.

two-thirds don’tVALUE THE ADDITION OF PRINT

Page 24: Pricing Strategies for Online Merchants

Economist.com subscription – US $59.00One-year subscription to Economist.comIncludes online access to all articles fromThe Economist since 1997.

Print and online subscription – US $125.00One-year subscription to the print editionThe Economist and online access to allarticles from The Economist since 1997.

Economist.com subscription – US $59.00One-year subscription to Economist.comIncludes online access to all articles fromThe Economist since 1997.

Print subscription – US $125.00One-year subscription to the print editionof The Economist since 1997.

Print and online subscription – US $125.00One-year subscription to the print editionThe Economist and online access to allarticles from The Economist since 1997.

Page 25: Pricing Strategies for Online Merchants

Combo

Print Only

Online Only

84%

0%

16%

Source: Predictably Irrational, 2010.

Economist.com subscription – US $59.00One-year subscription to Economist.comIncludes online access to all articles fromThe Economist since 1997.

Print subscription – US $125.00One-year subscription to the print editionof The Economist since 1997.

Print and online subscription – US $125.00One-year subscription to the print editionThe Economist and online access to allarticles from The Economist since 1997.

by adding a decoy, theRESULTS ARE RADICALLY DIFFERENT

Page 26: Pricing Strategies for Online Merchants

irrationalityTHE IMPACT OF PRICE ANCHORS

Page 27: Pricing Strategies for Online Merchants

why is the price of black pearlsANCHORED TO PRECIOUS GEMS?

Page 28: Pricing Strategies for Online Merchants

anchor price pointsCAN BE RESET OR REDEFINED

$1.49 $1.96

Page 29: Pricing Strategies for Online Merchants

for many products, anchor price pointsARE QUICKLY SET BY THE INTERNET

Page 30: Pricing Strategies for Online Merchants

irrationalityTHE SIREN CALL OF “FREE”

Page 31: Pricing Strategies for Online Merchants

irrationalityA CLASSIC COST/BENEFIT TRADE-OFF

$0.1573%

$0.0127%

Source: Predictably Irrational, 2010.

Page 32: Pricing Strategies for Online Merchants

irrationalityTHE COST/BENEFIT OF “FREE”

$0.14 $0.00

Page 33: Pricing Strategies for Online Merchants

irrationality“FREE” CHANGES EVERYTHING

$0.1431%

$0.0069%

Source: Predictably Irrational, 2010.

Page 34: Pricing Strategies for Online Merchants

Why should you strategically leverage pricing?

The economics of pricing and the role of irrationalityMost common pricing strategies used by merchantsA framework for applying pricing strategies to your businessLeveraging pricing engines to execute your pricing strategies

Page 35: Pricing Strategies for Online Merchants

Other

0

5

9

3.2%

7.5%

28.6%

60.7%

Use of Ending Digits

Marketing Bulletin Study, 1997.$3.00 - $1.99 = $2.01

FRACTIONAL PRICING1.

Page 36: Pricing Strategies for Online Merchants

COST PLUS/MARK-UP PRICING2.

Typically 2.5 to 3.0 multiple for webstores and retail stores.

$10.50 *2.5 = $26.25$4.68 (18%) contribution

Page 37: Pricing Strategies for Online Merchants

PENETRATION PRICING3.Used to capture market-share or create demand in early-stage products. Level is usually slightly above break-even – typically your price floor.

$22.99 = $1.42 (6%) contribution

Page 38: Pricing Strategies for Online Merchants

SKIMMING4.Used to maximize revenue when market conditions allow, low or no competition or spikes in demand – typically the price ceiling.

$29.99 = $9.42 (31%) contribution

Page 39: Pricing Strategies for Online Merchants

COMPETITIVE MATCHING5.

Ideally, at or near your target price. Positions you within +/- a couple of percentage points of the average price.

$24.99 = $3.42 (14%) contribution

Page 40: Pricing Strategies for Online Merchants

LOSS LEADER6.Priced at or below break-even with the intent to cross-sell or up-sell customers to more profitable products.

$17.99 = $3.58 (20%) loss

Page 41: Pricing Strategies for Online Merchants

VOLUME PRICING7.Providing price considerations for multiple purchases; consumers are trained to expect a discount.

$46.99 = $3.85 (9%) contribution

Page 42: Pricing Strategies for Online Merchants

BUNDLING8.Combining multiple products into a single purchase providing differentiation and greater perceived value.

$36.99 = $7.40 (20%) contribution

Page 43: Pricing Strategies for Online Merchants

LIQUIDATION PRICING9.Priced below break-even with the intent to move inventory, free up space, and make capital available for other investments.

$18.75 = Cost recovery ofInventory and S&H

Page 44: Pricing Strategies for Online Merchants

PROMOTIONS & SPECIALS10.

Time limited price strategies designed to increase demand, move inventory, and match competitors pricing/promotions.

Free Shipping = $18.75

Page 45: Pricing Strategies for Online Merchants

Why should you strategically leverage pricing?

The economics of pricing and the role of irrationalityMost common pricing strategies used by merchantsA framework for applying pricing strategies to your businessLeveraging pricing engines to execute your pricing strategies

Page 46: Pricing Strategies for Online Merchants

establishing aPRICING STRATEGY FRAMEWORK

Product Life-

Stage

Inventory Age

Pricing Strategy

Channel

Page 47: Pricing Strategies for Online Merchants

consider the product life-stageTO INFORM PRICING STRATEGY

Introduction• SkimmingGrowth• Competitive matching• PenetrationMaturity• Competitive matching• Volume• Bundling• Promotions & DiscountsDecline• Liquidation• Skimming

Decl

ine

Mat

urity

Grow

th

Intr

oduc

tion

Deve

lopm

ent

Time

Sale

s Vol

ume

Page 48: Pricing Strategies for Online Merchants

within each stage manage bothINVENTORY AGE AND CHANNELS

Establish maximum age by stage and product category:Introduction:• Long shelf-lifeGrowth• Short shelf-lifeMaturity• Medium shelf-lifeDecline• Longest shelf-life

Make adjustments in price level (discounts) and/or QOH as needed

Establish channel pricing strategy:

Webstore and catalogs• Usually higher than

marketplacesMarketplaces• Greatest price competition,

usually lowest price offered• May be different by

marketplace and fulfillment method

Physical store• Usually same as or more

expensive than webstore

Page 49: Pricing Strategies for Online Merchants

Why should you strategically leverage pricing?

The economics of pricing and the role of irrationalityMost common pricing strategies used by merchantsA framework for applying pricing strategies to your businessLeveraging pricing engines to execute your pricing strategies

Page 50: Pricing Strategies for Online Merchants

how doPRICING ENGINES WORK?

1. The pricing engine captures available pricing for your item(s) on your home market (AMZN)

2. Automatically re-prices items according to your pricing rules

3. Continually updates prices as the competitive prices, quantities, and sales change

4. Can be used as the basis for pricing other marketplaces and webstores

Page 51: Pricing Strategies for Online Merchants

1. Is shipping included or separate?2. Relative to the competition, where do I want to be

and for how long?• Average of lowest 5• 2% above lowest FBA• $0.50 below lowest

4. What is your price floor?5. What is your price ceiling?• Fixed, relative or none• What to do when no competitive listings?

DEFINE POSITION STRATEGY 1.

Page 52: Pricing Strategies for Online Merchants

1. Which competitors should be excluded?• Minimum quantity-on-hand• Minimum rating• Price is low-ball (outlier)

2. Who are the specific listings you want to compete against?• Amazon• Featured merchants• FBA, merchant fulfilled or both• Specific seller IDs

DEFINE COMPETITIVE SET2.

Page 53: Pricing Strategies for Online Merchants

1. Specific products2. Inventory Groups based on a combination of:• Category• Condition• Fulfillment Type• Quantities• Weight• Sales Rank• Age - Since Last Sold/Since First Received• Supplier/Source• Seasonal/Clearance/Sale

DEFINE WHICH PRODUCTS3.

Page 54: Pricing Strategies for Online Merchants

pricing rulesARE APPLIED SEQUENTIALLY

1. Item-level rules2. Inventory Groups in priority order3. Default rules 4. By marketplace including International

Page 55: Pricing Strategies for Online Merchants

Why should you strategically leverage pricing?

The economics of pricing and the role of irrationalityMost common pricing strategies used by merchantsA framework for applying pricing strategies to your businessLeveraging pricing engines to execute your pricing strategies

Page 56: Pricing Strategies for Online Merchants

Understand your business economics to inform pricing strategies

Consider the nature of irrational buying behavior to maximize opportunitiesApply a pricing framework based on life-stage and inventory aging to develop strategies

Implement strategies in a pricing engine to automate and scale application

Continue to monitor, adjust, and test as market and business conditions change

five steps to leveraging pricingSTRATEGIES FOR SUSTAINED GROWTH

Page 57: Pricing Strategies for Online Merchants

KEEP IT SIMPLE – NO MORE COMPLEX THAN IT NEEDS TO BE