pricing strategies for online merchants
TRANSCRIPT
MonCon EAST | May 18–20, 2012
#MonCon#MonCon
Leveraging Pricing Strategies to Grow Your Ecommerce
Business
Casey CareyVP Marketing, Monsoon [email protected]
@caseycarey
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
let’s take a look atTHE IMPORTANCE OF PRICING
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.
What is YourPricing Strategy?
What is the Best Pricing Strategy?
A Set of Strategies, that Over Time, Allow You to Make the MOST
Money Possible!
successful pricing strategy is aFUNCTION OF FOUR KEY ELEMENTS
Price
QuantityAvailable
Demand
Velocity
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?
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
How Much Money do You Make on a
Product or Inventory Group?
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
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
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
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
understand yourECONOMICS OF PRICING
LandedProduct
Cost
S&H
Sales & Mktg
Over-head
Net Profit (free cash)
Sales
Contribution
Break-Even
understand yourECONOMICS OF PRICING
$10.50
$8.25
$2.82
$24.99
Contribution$3.42 (13.7%)
Break-Even$21.57
Bashful Monkey 12”by Jellycat
4 x 4 x 12 inches1.0 lbs
UPC: 0670983045598
#4,292 in Toys & Games#15 in Baby & Toddler Toys > Stuffed Animals & Toys #64 in Preschool > Toddler Toys > Stuffed Animals & Toys
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
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
but often, purchase behavior is…HIGHLY IRRATIONAL
irrationalityTHE LAW OF RELATIVITY
Which middle circle is larger?
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.
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
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.
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
irrationalityTHE IMPACT OF PRICE ANCHORS
why is the price of black pearlsANCHORED TO PRECIOUS GEMS?
anchor price pointsCAN BE RESET OR REDEFINED
$1.49 $1.96
for many products, anchor price pointsARE QUICKLY SET BY THE INTERNET
irrationalityTHE SIREN CALL OF “FREE”
irrationalityA CLASSIC COST/BENEFIT TRADE-OFF
$0.1573%
$0.0127%
Source: Predictably Irrational, 2010.
irrationalityTHE COST/BENEFIT OF “FREE”
$0.14 $0.00
irrationality“FREE” CHANGES EVERYTHING
$0.1431%
$0.0069%
Source: Predictably Irrational, 2010.
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
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.
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
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
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
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
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
VOLUME PRICING7.Providing price considerations for multiple purchases; consumers are trained to expect a discount.
$46.99 = $3.85 (9%) contribution
BUNDLING8.Combining multiple products into a single purchase providing differentiation and greater perceived value.
$36.99 = $7.40 (20%) contribution
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
PROMOTIONS & SPECIALS10.
Time limited price strategies designed to increase demand, move inventory, and match competitors pricing/promotions.
Free Shipping = $18.75
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
establishing aPRICING STRATEGY FRAMEWORK
Product Life-
Stage
Inventory Age
Pricing Strategy
Channel
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
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
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
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
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.
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.
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.
pricing rulesARE APPLIED SEQUENTIALLY
1. Item-level rules2. Inventory Groups in priority order3. Default rules 4. By marketplace including International
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
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
KEEP IT SIMPLE – NO MORE COMPLEX THAN IT NEEDS TO BE
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