MonCon EAST | May 18–20, 2012

#MonCon#MonCon

Leveraging Pricing Strategies to Grow Your Ecommerce

Business

Casey CareyVP Marketing, Monsoon Commerceccarey@monsooncommerce.com

@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

ccarey@monsooncommerce.com

caseykcarey

caseycarey