Pricing Strategies for Online Merchants
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A review of the more common pricing strategies used by online retialers and multi-channel merchants to grow their business. Includes a framework for the application of pricing strategices based on product life-cycle and inventory aging to create a competitive advantage and sustained growth.
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Pricing Strategies for Online Merchants
- 1. #MonCon Casey Carey VP Marketing, Monsoon Commerce ccarey@monsooncommerce.com @caseycarey MonCon EAST | May 18–20, 2012
- 2. Why should you strategically leverage pricing? Pricing economics and the role of irrationality Most common pricing strategies used by ecommerce merchants A framework for applying pricing strategies to your business Leveraging pricing engines to execute your pricing strategies
- 3. let’s take a look at THE IMPORTANCE OF PRICING
- 4. 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.
- 5. What is Your Pricing Strategy?
- 6. What is the Best Pricing Strategy?
- 7. A Set of Strategies, that Over Time, Allow You to Make the MOST Money Possible!
- 8. successful pricing strategy is a Price Quantity Velocity Available Demand
- 9. markets are seldom in a 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?
- 10. #MonCon Why should you strategically leverage pricing? The economics of pricing and the role of irrationality Most common pricing strategies used by merchants A framework for applying pricing strategies to your business Leveraging pricing engines to execute your pricing strategies MonCon EAST | May 18–20, 2012
- 11. How Much Money do You Make on a Product or Inventory Group?
- 12. start by calculating Product cost + Shipping + Customs = Total Landed Cost + Risk + Overhead Shipping: Costs associated with crating, packing, handling, and Landed freight Customs: Duties, taxes, tariffs, VAT, brokers fees, harbor fees Product Risk: Compliance, quality, safety stock Cost Overhead: Purchasing staff, due diligence cost, travel, currency fees
- 13. then calculate Picking & Packing Shipping & + Shipping = Handling Cost + Carrying Picking and Packing: Costs associated with picking, packing, and S&H handling orders Cost Shipping: Out-bound shipping and surcharge fees Carrying: Facilities and insurance
- 14. then calculate Sales Commissions Sales & Marketing + Marketing = Expense Sales Commissions: Costs associated with marketplaces, affiliates, Sales & CSEs, and other CPA services Mktg Marketing: Paid search, advertising, email marketing, etc.
- 15. and finally, calculate Office Expenses + Administrative + Miscellaneous = Overhead + Financing Office Expenses: Office space, rent, insurance, supplies Over- Administrative: Indirect labor and management salaries head Miscellaneous: Other indirect expenses Financing: Interest and other finance charges
- 16. understand your Net Profit (free cash) Contribution Over- head Sales & Mktg Sales S&H Break-Even Landed Product Cost
- 17. understand your Contribution $3.42 (13.7%) $2.82 $8.25 $24.99 Bashful Monkey 12” by Jellycat 4 x 4 x 12 inches Break-Even 1.0 lbs $21.57 UPC: 0670983045598 $10.50 #4,292 in Toys & Games #15 in Baby & Toddler Toys > Stuffed Animals & Toys #64 in Preschool > Toddler Toys > Stuffed Animals & Toys
- 18. then 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 This might create a price anchor Is there a MSRP? point Are there any price MAP, contractual, regulatory constraints?
- 19. economists like to talk about 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
- 20. but often, purchase behavior is…
- 21. irrationality Which middle circle is larger?
- 22. Economist.com subscription – US $59.00 One-year subscription to Economist.com Includes online access to all articles from The Economist since 1997. Print and online subscription – US $125.00 One-year subscription to the print edition The Economist and online access to all articles from The Economist since 1997.
- 23. two-thirds don’t VALUE THE ADDITION OF PRINT Economist.com subscription – US $59.00 One-year subscription to Economist.com Includes online access to all articles from The Economist since 1997. Online Only 68% Print and online subscription – US $125.00 One-year subscription to the print edition The Economist and online access to all articles from The Economist since 1997. Combo 32% Source: Predictably Irrational, 2010.
- 24. Economist.com subscription – US $59.00 One-year subscription to Economist.com Includes online access to all articles from The Economist since 1997. Print subscription – US $125.00US $125.00 and online subscription – One-year subscription to the print edition of The Economist since 1997. The Economist and online access to all articles from The Economist since 1997. Print and online subscription – US $125.00 One-year subscription to the print edition The Economist and online access to all articles from The Economist since 1997.
- 25. by adding a decoy, the RESULTS ARE RADICALLY DIFFERENT Economist.com subscription – US $59.00 One-year subscription to Economist.com Includes online access to all articles from Online Only 16% The Economist since 1997. Print subscription – US $125.00 One-year subscription to the print edition of The Economist since 1997. Print Only 0% Print and online subscription – US $125.00 One-year subscription to the print edition The Economist and online access to all articles from The Economist since 1997. Combo 84% Source: Predictably Irrational, 2010.
- 26. irrationality
- 27. why is the price of black pearls
- 28. anchor price points $1.49 $1.96
- 29. for many products, anchor price points
- 30. irrationality “ ”
- 31. irrationality $0.15 $0.01 73% 27% Source: Predictably Irrational, 2010.
- 32. irrationality “ ” $0.14 $0.00
- 33. irrationality “ ” $0.14 $0.00 31% 69% Source: Predictably Irrational, 2010.
- 34. Why should you strategically leverage pricing? The economics of pricing and the role of irrationality Most common pricing strategies used by merchants A framework for applying pricing strategies to your business Leveraging pricing engines to execute your pricing strategies
- 35. 1. Use of Ending Digits 9 60.7% 5 28.6% 0 7.5% Other 3.2% $3.00 - $1.99 = $2.01 Marketing Bulletin Study, 1997.
- 36. 2. Typically 2.5 to 3.0 multiple for webstores and retail stores. $10.50 *2.5 = $26.25 $4.68 (18%) contribution
- 37. 3. 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
- 38. 4. 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
- 39. 5. 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
- 40. 6. 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
- 41. 7. Providing price considerations for multiple purchases; consumers are trained to expect a discount. $46.99 = $3.85 (9%) contribution
- 42. 8. Combining multiple products into a single purchase providing differentiation and greater perceived value. $36.99 = $7.40 (20%) contribution
- 43. 9. Priced below break-even with the intent to move inventory, free up space, and make capital available for other investments. $18.75 = Cost recovery of Inventory and S&H
- 44. 10. Time limited price strategies designed to increase demand, move inventory, and match competitors pricing/promotions. Free Shipping = $18.75
- 45. Why should you strategically leverage pricing? The economics of pricing and the role of irrationality Most common pricing strategies used by merchants A framework for applying pricing strategies to your business Leveraging pricing engines to execute your pricing strategies
- 46. establishing a Product Life- Stage Pricing Strategy Inventory Channel Age
- 47. consider the product life-stage Introduction • Skimming Growth • Competitive matching • Penetration Development Introduction Sales Volume Maturity Maturity Growth Decline • Competitive matching • Volume • Bundling • Promotions & Discounts Decline • Liquidation • Skimming Time
- 48. within each stage manage both Establish maximum age by stage Establish channel pricing strategy: and product category: Introduction: Webstore and catalogs • Long shelf-life • Usually higher than Growth marketplaces • Short shelf-life Marketplaces Maturity • Greatest price • Medium shelf-life competition, usually lowest Decline price offered • Longest shelf-life • May be different by marketplace and fulfillment Make adjustments in price level method (discounts) and/or QOH as Physical store needed • Usually same as or more expensive than webstore
- 49. Why should you strategically leverage pricing? The economics of pricing and the role of irrationality Most common pricing strategies used by merchants A framework for applying pricing strategies to your business Leveraging pricing engines to execute your pricing strategies
- 50. how do 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
- 51. 1. 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?
- 52. 2. 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
- 53. 3. 1. Specific products 2. 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
- 54. pricing rules 1. Item-level rules 2. Inventory Groups in priority order 3. Default rules 4. By marketplace including International
- 55. Why should you strategically leverage pricing? The economics of pricing and the role of irrationality Most common pricing strategies used by merchants A framework for applying pricing strategies to your business Leveraging pricing engines to execute your pricing strategies
- 56. five steps to leveraging pricing Understand your business economics to inform pricing strategies Consider the nature of irrational buying behavior to maximize opportunities Apply 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
- 57. KEEP IT SIMPLE – NO MORE COMPLEX THAN IT NEEDS TO BE
Notas del editor
- MonCon EAST KeynoteOverarching story:Not only are we the right partner for today, the opportunity that lies ahead is large and we are the right partner to help you navigate the futureAudience55% Stone Edge customers (web-only and multi-channel merchants)25% Marketplace customers (some media, some EGM)15% Partners and ecosystem providers5% employees
- Objective:Introduce attendees to Monsoon CommerceKey talking points:Acknowledge that maybe everyone is not familiar with Monsoon CommerceWe are solely focused on driving merchant successWhether it is sales and revenue growthIncreased profitabilityOr simpler, more efficient ways of doing business
- Objective:Introduce attendees to Monsoon CommerceKey talking points:Acknowledge that maybe everyone is not familiar with Monsoon CommerceWe are solely focused on driving merchant successWhether it is sales and revenue growthIncreased profitabilityOr simpler, more efficient ways of doing business
- The great news is Tim’s business has continued to grow and expand. In addition to benefiting from the overall growth of e-commerce, they now:Have multiple eCommerce sites using Miva Merchant with some shared inventory between the sitesBegan selling on third-party marketplaces including Amazon and eBayHave more sales from shoppers who received emails or shop online, but want to purchase over the phoneIn addition to expanding their channels and overall online sales growth, Tim has also needed to have a much more complete and flexible inventory of products. This includes:A dedicated warehouse supporting both retail store and online sales demandUse of vendor managed inventory (drop-shippers) for a portion of the productsOccasional use of retail inventory to minimize online back ordersUse of FBA for many of the products sold on the Amazon marketplaceTim’s business is not unique. In fact, earlier this year we surveyed 10,000 mid-sized online and multi-channel merchants and found that:53% had offline sales channels (stores and call-centers)36% have more than 1 website with shared inventory69% include marketplaces as part of their channel strategy67% have a least single warehouse62% use drop-shippers – averaging 26% of inventory drop-shippedThe downside of this success, is a much more complex operation and the need to continually find ways to be more efficient.
- Consumers ignore the least significant digits rather than do the proper roundingFractional prices suggest to consumers that goods are marked at the lowest possible price.When items are listed in a way that is segregated into price bands, price ending is used to keep an item in a lower band.Left-digit anchoring.This hypothesis suggests that people perceive the difference between 1.99 and 3.00 to be closer to 2.01 than to 1.01
- Consumers ignore the least significant digits rather than do the proper roundingFractional prices suggest to consumers that goods are marked at the lowest possible price.When items are listed in a way that is segregated into price bands, price ending is used to keep an item in a lower band.Left-digit anchoring.This hypothesis suggests that people perceive the difference between 1.99 and 3.00 to be closer to 2.01 than to 1.01
- Consumers ignore the least significant digits rather than do the proper roundingFractional prices suggest to consumers that goods are marked at the lowest possible price.When items are listed in a way that is segregated into price bands, price ending is used to keep an item in a lower band.Left-digit anchoring.This hypothesis suggests that people perceive the difference between 1.99 and 3.00 to be closer to 2.01 than to 1.01
- Consumers ignore the least significant digits rather than do the proper roundingFractional prices suggest to consumers that goods are marked at the lowest possible price.When items are listed in a way that is segregated into price bands, price ending is used to keep an item in a lower band.Left-digit anchoring.This hypothesis suggests that people perceive the difference between 1.99 and 3.00 to be closer to 2.01 than to 1.01
- Consumers ignore the least significant digits rather than do the proper roundingFractional prices suggest to consumers that goods are marked at the lowest possible price.When items are listed in a way that is segregated into price bands, price ending is used to keep an item in a lower band.Left-digit anchoring.This hypothesis suggests that people perceive the difference between 1.99 and 3.00 to be closer to 2.01 than to 1.01
- Consumers ignore the least significant digits rather than do the proper roundingFractional prices suggest to consumers that goods are marked at the lowest possible price.When items are listed in a way that is segregated into price bands, price ending is used to keep an item in a lower band.Left-digit anchoring.This hypothesis suggests that people perceive the difference between 1.99 and 3.00 to be closer to 2.01 than to 1.01
- Consumers ignore the least significant digits rather than do the proper roundingFractional prices suggest to consumers that goods are marked at the lowest possible price.When items are listed in a way that is segregated into price bands, price ending is used to keep an item in a lower band.Left-digit anchoring.This hypothesis suggests that people perceive the difference between 1.99 and 3.00 to be closer to 2.01 than to 1.01
- Consumers ignore the least significant digits rather than do the proper roundingFractional prices suggest to consumers that goods are marked at the lowest possible price.When items are listed in a way that is segregated into price bands, price ending is used to keep an item in a lower band.Left-digit anchoring.This hypothesis suggests that people perceive the difference between 1.99 and 3.00 to be closer to 2.01 than to 1.01
- Consumers ignore the least significant digits rather than do the proper roundingFractional prices suggest to consumers that goods are marked at the lowest possible price.When items are listed in a way that is segregated into price bands, price ending is used to keep an item in a lower band.Left-digit anchoring.This hypothesis suggests that people perceive the difference between 1.99 and 3.00 to be closer to 2.01 than to 1.01
- Consumers ignore the least significant digits rather than do the proper roundingFractional prices suggest to consumers that goods are marked at the lowest possible price.When items are listed in a way that is segregated into price bands, price ending is used to keep an item in a lower band.Left-digit anchoring.This hypothesis suggests that people perceive the difference between 1.99 and 3.00 to be closer to 2.01 than to 1.01
- Consumers ignore the least significant digits rather than do the proper roundingFractional prices suggest to consumers that goods are marked at the lowest possible price.When items are listed in a way that is segregated into price bands, price ending is used to keep an item in a lower band.Left-digit anchoring.This hypothesis suggests that people perceive the difference between 1.99 and 3.00 to be closer to 2.01 than to 1.01
- Consumers ignore the least significant digits rather than do the proper roundingFractional prices suggest to consumers that goods are marked at the lowest possible price.When items are listed in a way that is segregated into price bands, price ending is used to keep an item in a lower band.Left-digit anchoring.This hypothesis suggests that people perceive the difference between 1.99 and 3.00 to be closer to 2.01 than to 1.01
- Consumers ignore the least significant digits rather than do the proper roundingFractional prices suggest to consumers that goods are marked at the lowest possible price.When items are listed in a way that is segregated into price bands, price ending is used to keep an item in a lower band.Left-digit anchoring.This hypothesis suggests that people perceive the difference between 1.99 and 3.00 to be closer to 2.01 than to 1.01
- Consumers ignore the least significant digits rather than do the proper roundingFractional prices suggest to consumers that goods are marked at the lowest possible price.When items are listed in a way that is segregated into price bands, price ending is used to keep an item in a lower band.Left-digit anchoring.This hypothesis suggests that people perceive the difference between 1.99 and 3.00 to be closer to 2.01 than to 1.01
- Consumers ignore the least significant digits rather than do the proper roundingFractional prices suggest to consumers that goods are marked at the lowest possible price.When items are listed in a way that is segregated into price bands, price ending is used to keep an item in a lower band.Left-digit anchoring.This hypothesis suggests that people perceive the difference between 1.99 and 3.00 to be closer to 2.01 than to 1.01
- Consumers ignore the least significant digits rather than do the proper roundingFractional prices suggest to consumers that goods are marked at the lowest possible price.When items are listed in a way that is segregated into price bands, price ending is used to keep an item in a lower band.Left-digit anchoring.This hypothesis suggests that people perceive the difference between 1.99 and 3.00 to be closer to 2.01 than to 1.01
- Consumers ignore the least significant digits rather than do the proper roundingFractional prices suggest to consumers that goods are marked at the lowest possible price.When items are listed in a way that is segregated into price bands, price ending is used to keep an item in a lower band.Left-digit anchoring.This hypothesis suggests that people perceive the difference between 1.99 and 3.00 to be closer to 2.01 than to 1.01
- Consumers ignore the least significant digits rather than do the proper roundingFractional prices suggest to consumers that goods are marked at the lowest possible price.When items are listed in a way that is segregated into price bands, price ending is used to keep an item in a lower band.Left-digit anchoring.This hypothesis suggests that people perceive the difference between 1.99 and 3.00 to be closer to 2.01 than to 1.01
- Objective:There is an opportunity to more, a lot more to help you succeedTalking Points:Interviewed hundreds of customerSurveyed the marketStudied current providers and overall ecosystemLooked at trends driving the marketAnd while we have a good start and foundation to build on, we’ve identified 5 large gaps in today’s approachEasy management of products and inventory across channelsTrue, multi-channel order lifecycle managementIntelligent pricing across channelsLower friction tools – easier to buy and configure, simpler to use and less time spend supporting and maintaining the technologyRock-solid, deep integrations with all the key components of the Merchant’s ecosystem