Episode 6 - The Future of Pricing and Price Testing for Ecommerce
This three-part miniseries will cover basic pricing and price testing, competitive intelligence and understanding the market at large.
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- The Future of Pricing Strategy (00:08)
- Introduction (00:40)
- Most Merchants Never Really Price Test (02:14)
- Maximize for New Customers, Revenue or Profitability? (03:25)
- Long and Short Term Pricing Strategies (04:15)
- The Right Price Changes (05:06)
- Ecommerce and Ecommerce Pricing (05:52)
- Patrick Campbell, Founder & CEO, ProfitWell: (06:12)
- How to Unlock Some Understanding of Pricing Opportunities (08:36)
- The Invisible Supply and Demand Curve (11:50)
- How To Accurately Assess What Your Pricing Should Be (13:38)
- Brecker Brees, Co-Founder & Head of Business Development, Pricestack: (14:56)
- Does What is Fair and Equitable Impact Financial Gain? (15:18)
- How Do People React When They Feel They Are Being Treated Unfairly? (17:37)
- The Beginning of Pricestack (19:06)
- The Future of Pricing Will Be Data Driven (22:25)
The Future of Pricing Strategy (00:08)
The future of pricing strategy is daily dynamic price changes based on fundamental changes in all aspects of the market. Maybe even tying in the Dow Jones industrial index or, my local economy or, I really like the idea of stock. So if the product is selling really well today, the price starts to go up a little by little because as we get near the end of our inventory, that is actually more valuable to us as a brand.
This episode is sponsored by Pricestack. I'm really excited to introduce this tool to you because I think it might be a game-changer for your business. More about them later in the episode.
If you've been following the future of Ecommerce at all, you've heard me talk about the four P's of Marketing. They are - Product, Placement, Promotion, and Price.
And pricing is what I want to talk about in this next three-part mini-series, or we'll start with basic pricing and price testing on your website, move into competitive intelligence, and understanding the market at large.
And then we'll talk about discounting and promotions from a pricing and profitability standpoint, how to find that right discount amount that both satisfies your high conversion rate that you're looking for as well as your high-profit margin, which are often two competing factors in pricing.
Most Merchants Never Really Price Test (02:14)
I'd like to begin by first acknowledging that you probably like most merchants have never done really any price testing at all for your business.
You set your product price based on your cost of goods sold margin. Maybe you'll look around the industry briefly or unofficially, or maybe even your suppliers have set your price for you.
And of course, if you cannot change your pricing, then price testing is not really going to be for you. But if you own the product, you own the channel and you understand the operational side of your fixed costs, the fixed landed cost the cost of customer service, the cost of taxes, the cost of technology on the impact of the change in price, on your margin and profitability.
And that I think is really where you're going to be able to understand that the person on the website right now might not be the best price for your brand and for your business. And you could also begin to understand that you have to choose a price based on one of three factors and they can't always align.
Honestly, they only align under freakishly good circumstances.
Maximize for New Customers, Revenue or Profitability? (03:25)
So you're either trying to maximize for new customers, which is obviously going to be the lowest price, right?
You might also instead maximize for revenue, which can be a low price, but maybe not as low as getting new customers. And so you're maximizing your overall revenue because if your price is low enough, more customers will buy.
But if your price is too low, then actually, multiply in your average order value times, the number of customers is lower.
So maximizing by customers first, maximizing by revenue, we'll have two fundamentally different price points, but they will both be on the low end of your pricing spectrum.
And then of course you can maximize for profitability, which is typically going to be a higher price point, but it might get you less customers. And it might not also generate as much revenue as you want as well.
Long and Short Term Pricing Strategies (04:15)
And so you have these three competing opportunities to optimize your pricing and you can change them based on other factors in the business.
Like, your inventory on hand, what's happening with your supply chain? Is the team overwhelmed this month? Maybe you want to pull back on new customers this month to focus on profitability, but next month, you're going to do a big launch with a new product that enters your lineup.
And you want to maximize for new customers again and work with the influencers to push forward on that top of funnel-ish kind of part. Or maybe you feel like you need to rush to market with your product because you feel competitors will be entering soon. And so you want to keep the price low to get lock-in from your customers today, as opposed to making a lot of profitability in line in your pockets today.
The Right Price Changes (05:06)
And so of course, as these factors tend to compete with each other on a regular basis, you have multiple times in your company where you really need to decide on the right pricing. That is not what we see in practice though, is it? We see basic fixed pricing, no changes, no tests.
If we are going to change price, it's often a slow and arbitrary increase based on our increase of cost of goods sold to maintain the status quo, to maintain the existing margin that we need for our business to exist. But at no point, does that help you maximize new customers, revenue or profitability? It's really just keeping the lights on.
Ecommerce and Ecommerce Pricing (05:52)
With that said, I'd like to take a look at where we are today in Ecommerce from a pricing strategy standpoint. And so I talked with Patrick Campbell, who we've had on the show before, but specifically about his thoughts on Ecommerce and Ecommerce pricing and what we're doing right, and what we're doing wrong today.
Patrick Campbell, Founder & CEO, ProfitWell (06:12)
"When it comes to pricing and Ecommerce, I think that you have to look at what the best in the world at pricing are doing. And these are luxury brands that have been around for a long time.
These are newer brands that have done really, really well with segmentation. But on a very, very practical level, I think where most people miss the mark is they focus way too much on their costs and way too much on their margin upfront.
And I'm not saying that these are not important. These are going to come into play in the pricing conversation really, really quickly.
But if you start from the perspective of just your cost and your margin, you might not necessarily find out who the best segment you're going after is because you might only be going after that segment. That goes, "Oh, I need like just a 30% margin.
Or I just, I want to get a 40% or whatever your vertical benchmark is. When in reality, if you start from what's called a value-based perspective, you can actually collect really, really good data on who is the best segment.
So for example, like I can go out and I'm happy to go deeper into this. I can go out and I can collect data from all types of different customer segments for my new beauty product or for my new backpack that I want to come out with or whatever it ends up being. And with that data, I can determine, okay, well, these folks are willing to pay the most. These folks care about these things.
These folks look at me as a luxury product. These folks look at me as a utility, and then I can start to make some decisions and bring that cost data back into play, where it's like, okay, well this customer segment, they're not even gonna cover my costs.
Like I'm either not communicating them correctly. They don't see the value in the product, or they're just not my customer. Right?
And if you start from that value-based perspective, which, involves like going to the customer and not asking them, Hey, are you willing to pay for this?
But asking them some different questions to get at price sensitivity, you're gonna be able to find out where you are in the market and who the best type of segment that you should be targeting is, and then make your pricing from there rather than kind of starting from costs. Which oftentimes there's a lot of false positive in terms of like who you should actually be targeting.
And in some places, what you'll find is you have a really fervent base who really, really wants your product. But they can't afford it or their willingness to pay isn't high enough. So this is where, in traditional retail, you got the outlet stores, right?
Like very, very luxury brands. They make specific products for outlet stores that you'll never see in their kind of core stores or their core marketing, because they're made specifically for a lower cost consumer.
And I think that's where that segmentation of that research really comes into play. And it'll help you guide your pricing practices rather than just chasing costs, which again are important, but they shouldn't be the primary thing that you're looking at when it comes to making those decisions."
How Unlock Some Understanding of Pricing Opportunities (08:36)
And let's dive a little bit deeper and listen to his three tips on how you can do custom development that might unlock some understanding of your pricing opportunities.
"So a couple of tips I'm doing this research properly.
So the first thing is take advantage of how human beings think about value. So economists and psychologists have studied this for a really long time asking, answering a question like "How much are you willing to pay for this?" It's a really, really tough thing for the human mind to like answer.
Whereas if I asked you, "Hey, at what point is this way too expensive?", "Or is this worth more than this?"
Those are easier questions to answer because we think about value as a spectrum. So I know this computer that I'm talking on right now is worth more than the bottle of water that's sitting next to me.
And so if you ask a question like at what point is this way too expensive, that you just would never purchase the product. And then at what point is this such a good deal? You'd buy it today. All of a sudden I have a range there.
And then across even a qualitative group of a couple dozen people, I can start to see like where I'm at.
Now. The second big piece of advice here is make sure that especially in the world of Ecommerce, you're collecting from a bunch of different segments.
There is absolutely no excuse for Ecommerce brand, not being able to collect data. And in fact, some of the best companies in the world when it comes to consumer insights are Ecommerce brands or retail brands. And so it's one of those things where go out and use a service, like ask your target market - aytm.com.
You can get anyone from a vegan soccer mom or dad in the middle of Kansas to a posh lawyer in London to basically answer these types of questions and these types of surveys, and then make sure you're segmenting based on who you think your target brand is.
And that segmentation goes deeper than just moms or dads, but it's like moms or dads with 2.3 kids who, like this product, because that's the segmentation.
That's not only going to help understand like value when it goes from the top of the funnel through your ad campaigns, but all the way through your pricing and monetization.
And then obviously through repeat purchases or retention, depending on if you're deploying a subscription or just wanting to look for repeat purchases. And then I think the final, big piece of advice here is your pricing and your monetization. They should be a living growth lever within your business.
We see with Ecommerce brands, both subscriptions and not, they focus so much on acquisition, right? And that's where you're going to focus more than half your budget, more than half your time. It's just a reality of what you're going to be focused on because you know, it's where the most competitive place of your business is.
But when it comes to your monetization, your retention, those are huge growth levers within your business. And putting a little bit more extra effort into your monetization and make sure you're on a very consistent basis, adjusting your promotion strategies, your pricing, your add on strategy.
All of these different things will ultimately make those average order values go up that repeat purchase rate or that retention rate go up. And then ultimately, helps you take advantage of getting the most value from those users who love your brand so much."
And with these amazing tips on customer development, I really hope that you take them to heart and actually start talking with customers, segmenting customers, and understanding the value they're getting from the products you're selling to them.
The Invisible Supply and Demand Curve (11:50)
Now that we understand the present state of pricing and the opportunities to understand the customers in their willingness to pay. I want to bring it over to the opportunity that you may not realize exists sitting in your data right now.
You see, because you've sold hundreds of products and we understand the website visitors and the conversion rate, and maybe there was a discount or promotion going on there, or pricing changes or other things.
There is an invisible supply and demand curve, which is basic economic theory, that says there is a supply of product and a demand and that at some intersection they meet, which is where your customer purchases.
And of course you've never drawn your supply and demand curve, but it exists nonetheless. So today's sponsor Pricestack, and you can find them at ecomtech.link/pricestack.
They have developed artificial intelligence that takes your existing data and price points in order to find that supply and demand curve. And that's how they're able to extrapolate and discover new price testing opportunities, which will predict the number of sales you will get at various price points to understand the price elasticity of your product, your store, and your brand and across product selling.
It's really quite a lot to think about to give you just an idea before we even get into it, think about it like this. You sell multiple products on your site and maybe most people are buying two or three different products at the same time.
If you increase the price of maybe your core product, your large product, there might be different accessories that don't sell as well because the customer is spending all of their money on the upfront product.
How To Accurately Assess What Your Pricing Should Be (13:38)
So maybe you increase the price of the big product from $50 to $60. And you find that people buy less bells and whistles literally, or accessories or whatever else you have around that.
Is that good for you or bad for you? How will that affect your margin, new customers, sales, revenue, and profitability? It's really tough to tell. So understanding if you can increase the price point of maybe the flip is instead of increasing the price of your core product, you lower that price and increase the price of your accessories, which are higher margin.
And typically accessories have the higher margins and people are just selling the core products that you can really make your profitability and the accessories. There is this whole game going on with pricing that you can think about as a smart business strategist, marketer and owner of your company, or whatever your role might be.
You can start to imagine what that price is, but our minds can only go so far.
And that's really, to me where the power of Artificial Intelligence is so exciting because it really can use all of the data to give you an accurate understanding of what your price should be. With that said, let's hear from the team at Pricestack on how they came up with this idea and how they were able to build an accurate pricing model for any Ecommerce business.
Brecker Brees, Co-Founder & Head of Business Development, Pricestack (14:56)
"So I have always been extremely interested in economics. I have a degree in economics and the program that I went through in college was extremely heavy and experimental economics, especially in behavioral experimental economics."
This is Brecker Brees, co-founder and Head of Business Development at Pricestack.
Does What is Fair and Equitable Impact Financial Gain? (15:18)
"I did some research while I was at university and my interest has always been in things business-related commerce related and specifically, the economics in the behavioral economics of price.
The university was doing some research about group behavior. I don't know how much I can say about the project, cause I'm sure there are still some things that are ongoing.
But what I was doing was analyzing hundreds and hundreds of experiments that were done, where they took on group identities and played sort of a simulation kind of like a video game.
And there were thousands of hours of recordings of those sessions. And what we were tasked with doing is looking at the data in the backend, looking at group behavior trends and group behavior.
We were given a set of a lot of open-ended questions, but a lot of very specific things that the university was interested in researching particularly about sharing and about sort of the psychology behind sharing in the simulation, but also in sort of the practical business world, right?
People that are equitable and charitable. How does that impact sort of a you get what you give sort of thing, right? Is there any merit towards the sort of idea that there is something about human psychology, where people that are givers, people that help others.
People that aren't stingy, is there actually a financial benefit to that? Can you actually improve the allocation of resources inside groups and between groups, if you are charitable, equitable, fair, right?
And sort of, that's one thing that we had to look at, right? The standard of fairness changes between groups.
Sometimes two different groups do not agree on what is equitable, what is fair, right? And so in the experiment, the currency was fruit like apples, but how that translated to the real world, right.
Is there something to be said about those relationships between groups and how they feel about what is fair and what is equitable, does that actually impact financial gain and the allocation of resources?"
I can see how this can translates to pricing. You're kind of talking about a positive sum game, right? Where altruism increases the pie for maybe everybody.
How Do People React When They Feel They Are Being Treated Unfairly? (17:37)
"Yeah. And also how do people react when they feel like they're being treated unfairly?
One thing that I thought was really interesting, and this is definitely something that I think is very inconclusive.
I think there needs to be a lot more research done in this area, but there is a scenario where two people are given the option to receive different payouts. And for example, you can have one person where they have to accept the decision of the other person, right? So if they don't accept the decision of the other person, both people get nothing, right?
So you have the individual that makes the decision, they can take $20 and give the other person $5 or they can give themselves $2 and the other person $2, and then you have perfect equality. It was very interesting to see how some people really cared that they were being stiffed, right.
When that one person chose to get $20 and give them $5. And they denied that and accepted $0 just out of spite. Against the other person. And sometimes they realized, right. That both individuals would have been less well off if the person chose the option of equality. And I think that was extremely interesting, right?
How people reacted when they knew they were being treated unfairly, but they were better off than they would have been otherwise."
So that's what gave Brecker the idea about perhaps pricing models in Ecommerce. Now let's hear about the beginning of Pricestack.
The Beginning of Pricestack (19:06)
"Our CEO and co-founder of Pricestack - Ian McCue, him and I saw that, and this really just came with the rise of DTC Ecommerce right.
In the past three or four years, DTC Ecommerce has just been taking off like crazy. And you've been seeing the little guys succeed. And become rather large Ecommerce businesses that just really started from nothing, had hypergrowth and now are established players.
And we see new ones popping up every single day, but we saw that these new brands, what they were doing with their pricing strategy is like you said earlier, they were looking at their cost of goods, kind of looking at what the competitors were charging.
If they sold a really differentiated product, they were finding something that was kind of close. And then just rolling with it and maybe doing a little bit of AB testing here and there.
But when it really came down to it, they were guessing, or they were using a really old out of fashioned outdated pricing model, like cost-plus or something like that. So these SMBs really did not have a good tool for identifying with a really high degree of certainty, what they should be charging for their products. They really had no idea.
And the worst thing is they didn't know that they didn't know. Because there was nothing that existed to even tell them that they had a problem, let alone solve it. So that's really what gave us the passion to set out and build a tool to allow them to one, identify the problems in their pricing strategy. But two, to actually do something about it."
Did you kind of just look at some of these brands and from your past experience in college, just go, they're not using economics to model their pricing. Was that kind of how it felt?
"Looking and also talking. It became really apparent. I mean, after talking to three or four merchants of various size, I remember an early conversation I had with a merchant now that is rather large.
I would say out of the SMB space now is a very large company. They sort of picked a pricing model that was similar to cost-plus very early on and just stuck with it. And they said they weren't happy about it, but they did not want to spend the time, the money, the energy to figure out how to create something more optimal.
It didn't make sense for them. They would have had to have hired some really experienced in-house people, spend a lot of time, a lot of money to basically get the result that we could get them in a very short amount of time for a fraction of the cost.
Pricestack is able to optimize merchants prices through our Shopify app. It's really as easy as merchant installing Shopify, integrating price tag with Google Analytics. It's just one click and 24 to 36 hours of us analyzing that historical sales data. And from there, our model will already have some data-driven optimal price suggestions."
So to install Pricestack for completely free and get some pricing analysis done on your existing data, you can head on over to ecomtech.link/pricestack. That's ecomtech.link/pricestack.
The Future of Pricing Will Be Data Driven (22:25)
So the good news is that there seems to be hope on the horizon.
While many merchants may have predicted that the future of pricing has to do with slashing prices and competition. We can see that there is a machine learning model that can be applied to our data, helps us optimize our price.
And it turns out I think the future is going to be even more impactful than that. I think in the future, we're not going to be making arbitrary pricing or discounting decisions.
And if you enjoyed this episode, please do like, follow, subscribe, leave a review. If you've got a few minutes, it really can help spread the word about the show. And you can get the show notes for this episode, links and additional details on all the things we talked about at ecomtech.link/podcast. With that said, let me pass it back off to Brecker.
"So the future of pricing strategy is definitely going to be data-driven. And it's also going to involve a lot of really, really cool things that are happening with discounting.
To solve the pricing problems Ecommerce has sort of always turned to discounts and promo codes, but they've really neglected price. And now discounting has sort of become this giant problem, in my opinion, right?
With just over discounting, offering everyone a discount, doing it too frequently, there needs to be this relationship. That's very unique relationship between price and discounts or both of them are playing off one another feeding off one another, sharing data and information with one another and creating an environment in an ecosystem where people are both satisfied with the prices that they're seeing, the list prices of products.
They're satisfied with the promos and discounts that they're receiving, but not just the consumer is satisfied, but also the merchant, right? They're being conscious of their growth of the revenue of their bottom line margins while also satisfying their customers, right?
Finding this, give and take this happy medium that they can charge list prices that they're happy with.
Not over discount, be aware of their margins and their growth while still satisfying their customers. I feel like in this situation, using data science, using some very powerful AI and ML based tools, merchants can really have their cake and eat it too."