Why this idea means business : We explore the challenges of managing online store pricing. Learn the 3 key areas which shape your D2C pricing strategy. Read this to plan for more profitable online store pricing.
How much is this idea worth?
Idea : To sharpen your approach to online store pricing. Based on our standard business case assumptions, the value of this idea is :-
- Source of business – More spend
- Skill area – Marketing
- Commercial hypothesis :-
- # customers = 1,000
- Spend/month = $100
- Est. increase in monthly spend/customer = +$3.50 (+3.5%)
- Est. sales increase = +$3.5k (monthly) | +$42k (annual)
Before you launch a direct-to-consumer (D2C) store, you build a pricing plan as part of your business model and profit and loss.
But after launch, managing your online store pricing is an ongoing job. And it’s very different from how most businesses manage price.
When you sell via a retailer or B2B, pricing is set well in advance. Want to change your regular price? Run a promotion? Then build a business case. Give lots of notice. Agree terms with the customer.
Pricing in most businesses moves slowly. Not so in D2C. Price changes can be done fast. Changing a product’s price in a D2C platform like Woocommerce or Shopify takes minutes. D2C gives you more flexibility to test different price options. You control the price your online store website shows.
But in the immortal words of Jeff Goldblum’s character in Jurassic Park, just because you could do it, doesn’t mean you should. You’ll still need an online store pricing plan to cover :-
- competitive strategy.
- what’s included in the price and what isn’t.
- regular vs promotional vs special pricing.
Competitive strategy
Your competitive strategy and positioning from your D2C launch plan influence your pricing.
For example, if you’re a cost leader, price is at the heart of what you do. Your goal is to offer the best value. You drive traffic and conversions by highlighting price.
Every category always has segments that want low prices. (See our what online shoppers want article for more on this).
If what you sell is similar to competitors, price may be the only lever you can pull.
However, if you’ve gone for a differentiation or niche strategy, you focus on something other than price. Higher quality. Unique products. Brilliant customer service. You still need a price strategy and plan, but it doesn’t focus on value. That usually means you can price higher and rely less on price discounting.
Pricing impact on the D2C profit and loss
These different strategies play out differently in the D2C profit and loss.
With cost leader low prices, your goal is to drive more unit sales. Usually, lower-priced products sell more units. There are more Fiats on the road than Ferraris, for example. More cask wine drunk than Krug.
Cost leaders focus on everyday low prices. They only price discount in special circumstances. For example, to hit a year-end sales target, clear out older stock or defend against a competitor.
For different reasons, niche brands also don’t often do much price discounting. They know they have loyal customers as what they offer is unique and unavailable elsewhere. Unless there’s clear evidence a price promotion will bring in new customers, niche brand price promotions will only give money away to customers who’d have bought anyway.
It gets more interesting with differentiated brands. Brands with strong differentiation will rarely price promote. They know their customers are mostly loyal. But brands that are only a little differentiated with less loyal customers often need price discounts to drive more unit sales. Which means making a total sales trade-off between units sold and income per unit sold when doing a price promotion.
Example - units sold and total sales
Let’s look at an example.
Say you normally sell 100 units a week of a product at $10 each. Total sales are $1,000. If you cut the price to $5, you have to sell 200 units to hit the same total sales.
But say you only sell 150 units. Then, you’re losing money. But sell 250 units, and you’re making more money. This is all about forecasting. Hard to do accurately until you start testing offers and gathering data.
One of D2C’s biggest benefits is that you can easily test price promotions. Quickly see what works and what doesn’t. In this case, if your price cut regularly gets you that 150-unit uplift, it’s worth repeating the offer.
Range pricing
All well and good if you only sell one product at one price. But that’s not how online stores and online store pricing works. You normally sell a range of products, all at different prices.
For example, you might have T-shirts at $30 and hoodies at $65 as we do in our shop. In that case, you also have to factor in the need to sell more than 2 T-shirts to make the same income as selling a single hoodie. Selling more higher-priced products helps raise your average spend per basket.
So from a pure sales point of view, it makes sense to try to sell more of your premium-priced products.
They feature in your advertising campaigns. You showcase their product pages on your store website.
However, you also have to trade this off against customer demand. People generally buy more $30 T-shirts than $65 hoodies. So you’re more likely to do price promotions on your higher-priced products to incentivise shoppers to buy them. There’s more money to play with, and shoppers will see the price cut on the more expensive item as a better bargain.
However, as per our advanced e-Commerce selling techniques, there are exceptions. For example, products which use scarcity to sell. You want to keep the price consistently high on those as this makes them more desirable to customers.
Gather data on the trade-off between income and demand
This trade-off of managing the income from each product versus the demand and price point is a key skill when managing an online store.
You try out different price activities to gather data on which drives sales. You analyse this and identify opportunities on your e-Commerce dashboard.
These then shape marketing decisions like which products to feature in your advertising campaigns, and how you set up your product pages. They shape how much priority to give price in those activities.
What’s included in the price and what isn’t
When you sell D2C, the “price” isn’t just the price of the product. Other factors come into play too. You have to be clear upfront about what’s included in the price, and what isn’t.
For example, price may or may not include delivery cost (more of which in a second), warranties, insurance, service charges and returns costs.
The Australian Competition and Consumer Commission (ACCC) has clear guidelines on what businesses can and can’t do with pricing.
Their overarching key principle is, “Businesses must display clear and accurate prices, and must not mislead consumers about their prices, or the reasons for price changes.” This applies to online store pricing too.
It seems like basic common sense to not mislead or confuse your customers. Shoppers only buy from stores they trust. If you “hide” charges or fiddle around too much with your pricing, it erodes that trust.
Delivery cost - who pays for it?
Delivery cost has lots of impact on your overall online store pricing approach.
You pay the delivery company every time they deliver an order. As per our online business model guide, you have to work out how much of this cost, if any, you pass on to the customer.
Usually, the higher the order value, the more likely you can absorb some or all of the cost. With low-value orders, you normally charge the customer the full delivery cost.
Delivery cost example - selling one item
Let’s look at an example to see why you should charge delivery on low-value orders.
Say you sell a T-shirt which costs $15 to make. You sell it in your store for $30. And say the delivery cost per order is $15. Note, that the “per order” here is important. Delivery companies charge per delivery, rather than the actual price of what’s being delivered.
If you don’t charge the customer for the delivery, you make no money. The customer pays $30. The T-shirt costs $15 to make. You pay the $15 delivery. So, zero profit and an unsustainable business model.
But instead, let’s say you charge $10 for delivery. The customer pays you $40. $30 for the T-shirt and $10 for delivery. Take away the $15 to make the T-shirt and the $15 for the delivery company and now, you make $10 profit. Clearly a more sustainable model.
Delivery cost example - selling multiple items
Now, say the customer orders 3 T-shirts. This is much better for you as remember, the delivery cost is per order. The delivery cost for 3 T-shirts should be the same as for 1 T-shirt. (Note, delivery companies will charge extra for heavy or bulky deliveries, but that’s not relevant here).
Assume it’s still $15 delivery. At that rate, you could offer free delivery and still make a profit. Your income is $90. 3 T-shirts at $30 each. Your costs are $45 to make the 3 T-shirts, plus $15 for the delivery. So, you make $30 on that sale, even after paying for the delivery.
This is why you see many online stores offer free shipping above certain price points. It sounds like a good deal for customers and it helps boost their profitability.
Regular vs promotional vs special pricing
Once you’re clear on your competitive strategy and what’s in and out for your pricing, the final step is to activate your actual online store pricing for each product. There are 3 main parts :-
- Regular pricing.
- Promotional pricing.
- Special pricing.
Regular pricing
Your regular price is your baseline unadjusted charge for selling a single unit. It’s sometimes also called the Recommended Retail Price (RRP) when you sell via retailers. It’s what the customer expects to pay, and acts as a benchmark for any price changes you make.
In your profit and loss, it’s the starting point for your forecast unit sales numbers. You start your online store pricing plan by saying you expect to sell X number of units at this regular price. If you then run promotional or special prices, you adjust that base forecast accordingly.
In most cases, you want your regular price to stay, well, regular. It’s the price that sticks in customer’s heads. When you run a price promotion, they’ll know how much of a discount you’re offering. It’s also how they’ll benchmark your price against competitor prices.
Ideally, you’d change your regular price no more than once a year. Less if you can manage it.
Promotional pricing
Your promotional price is a time or action-related discounted price offer on your regular price.
For example, a time-related offer would be 20% off if you buy before Monday.
A buying action offer would be buy one, get one free or free delivery on orders over $150.
The aim is to incentivise the purchase. You want to create a stronger call to action to buy.
For example, you highlight the customer will miss out if they don’t buy while this offer lasts. They’ll get something extra if they buy this way or spend this much.
For this promotional pricing to work, the customer has to see some extra value they wouldn’t otherwise get. They work best with customers at the consideration / trial stage. They’re close to buying, but not yet convinced. Price promotion is a great way to nudge those customers to make a purchase.
Price promotion planning
When planning a price promotion, first make sure your offer is clear and not misleading.
Many companies are taken to the ACCC because customers complain they made misleading claims about their promotions. Always check what’s on offer has no unexpected costs for the customer.
Then, consider how often and at what times you want to run price promotions. As you gather your own sales data, you can test out different scenarios.
You’re looking for times and products which drive the best sales uplift. This varies by category. But as we said earlier, the great thing about managing a D2C store is you directly control when you run price promotions.
For example, you could try an early bird special where orders placed before 10am get a discount. e.g. florists and caterers could offer this. Or promotions on specific days of the week e.g. free pizza delivery on Mondays and Tuesdays. Or longer-term, you tie your price promotion to specific times of year or PR events. For example, Christmas, Easter, Halloween and Black Friday are all popular times to run price promotions.
Special pricing
Finally, there’s special pricing. This is similar to promotional pricing but is usually focused on specific customer segments or longer-term buying actions.
For example, you could offer your CRM program members discounted prices for being part of your “club”. Or you offer them “refer a friend” discounts if they get other people to sign up. Maybe, you keep some products back and offer them as exclusive “member-only” products at special pricing rates.
Special pricing also covers areas like asking customers to sign up to a subscription service so they get reduced prices versus one-off purchases. They commit to keep buying for a certain length of time, and in return get a better price deal on each purchase.
These types of special pricing approaches are usually done by brands following a differentiation or niche competitive strategy. They use these special prices to give them pricing flexibility without damaging perceptions customers might have about their premiumness and desirability.
Conclusion - Managing online store pricing
Your online store pricing is a key part of how you manage ongoing D2C operations.
Price drives how many customers buy, how much they pay per unit, and ultimately how much profit hits your bottom line.
You’ve got lots of flexibility to experiment and optimise your price when you sell D2C. But, you should still have an overall plan for what you’ll do.
First, the online store pricing plan should fit with your competitive strategy and store positioning. Cost leader brands go hard on price. Differentiation and niche brands less so, but you still need a pricing strategy.
Then, you should define what’s included in the price the customer pays, especially delivery costs, and make sure your pricing is clear and not misleading.
Finally, your online store pricing plan should map out your regular, promotional and any special pricing. Pricing and sales data should then feed into your e-Commerce dashboard. You soon learn what is and isn’t working and use that to adjust future price plans to optimise your profits.
Check out our managing an online store guide and our online store profit and loss article for more on this. Or get in touch if you have questions about how to manage online store pricing.
Photo credits
Visa card and laptop : Photo by CardMapr.nl on Unsplash
Counting cash : Photo by Sharon McCutcheon on Unsplash
Doorstep delivery : Photo by MealPro on Unsplash
Marketing Dashboard : Photo by Carlos Muza on Unsplash
Small fragile delivery box in hand : Photo by jesse ramirez on Unsplash
Sale : Photo by Justin Lim on Unsplash
Amazon Christmas package : Photo by Wicked Monday on Unsplash
