Price is the number one profit driver out of the seven Ps of marketing.
However, it is often the most overlooked and misunderstood pillar among many brands and enterprises.
The first official price tag on a product appeared in 1861 after it became frowned upon for consumers to haggle and negotiate the price of an item – and what a journey the price tag has been on since then.
Today, pricing software, data scraping, and automation play vital roles in how prices are set. Nonetheless, a brand that wants to achieve commercial success with a robust pricing plan can’t simply rely on software to do the job.
Brand owners must commit to understanding and learning about pricing as a part of their strategy.
In the current e-commerce landscape, many business-to-business (B2B) brands are successfully creating new direct-to-consumer (D2C) channels. This makes it crucial for brands to improve pricing maturity, as B2B and D2C pricing differ.
After all, a simple 1% increase in prices can yield up to 10% in increased profits, according to Prof. Hermann Simon of Simon-Kucher & Partners.
This article will discuss the various facets of pricing that can build, expand, and deepen a brand’s pricing maturity and knowledge. In addition, it will also explore how adding a D2C channel to a brand’s omnichannel strategy may be commercially and strategically valuable.
How a D2C approach benefits brands
The migration to D2C has been a slow, quiet process.
However, the conditions of the global pandemic expedited many years of the D2C shift, resulting in a rush of brands trying to establish new D2C channels. In the US, D2C sales increased by 36% between 2020–2022, while 64% of consumers made regular purchases directly from brands in 2022.
This led to the rise of digitally native vertical brands (DNVBs) – brands that were born in the digital era and have never known traditional brick-and-mortar retail.
However, the move to D2C isn’t solely due to pandemic conditions.
The retail landscape has evolved through the ever-changing realm of consumer behavior just as much as physical or geographical disruptions. Purchasing habits, brand loyalty, and price sensitivity are key to retaining consumer attention.
Understanding these factors is crucial in determining your target customer and developing a pricing strategy that resonates with them.
Maximizing a customer’s lifetime loyalty
McKinsey suggests that D2C e-commerce is the best way for a brand to retain long-term customer loyalty, as it allows the brand to interact one-on-one with customers to steer strategy, innovation, pricing, marketing, and any other department in real time.
In an academic article titled “Valuing Customers” in the Journal of Marketing Research, researchers surmised that retaining a customer costs up to five times less than earning a new one.
Not only is it cost-effective to harness and build customer loyalty, but it is the solution to long-term D2C e-commerce success.
Expanding to new markets
Part of the risk a brand takes when going D2C is learning which target market is best for it, with geographical and socio-economic factors being top of mind.
The benefit of owning a D2C platform is the ability to test new markets, channels of sale, and potentially fruitful platforms. Even if an expansion is unsuccessful, it still adds to gaining valuable knowledge about your product and its place in online retail.
Understanding your customer and retail partnership needs
Having an omnichannel strategy is pertinent to exceeding your commercial goals. A successful omnichannel strategy may include establishing a D2C channel and a strong retailer partnership. It may include selling online and in-store.
An important focal point should be how to best engage with and understand the customer. The customer that buys directly from your D2C online store is not the same customer that buys one of your products from a retailer. They have different goals, behaviors, and buying habits that have motivated their choice of channel and product.
A 2022 study showed that while 39% of Gen Z shoppers (aged 19–24) use social media as an influencing factor to decide what to purchase, only 13% of Gen X shoppers (aged 43 –58) do the same.
This indicates how unique each age and socio-economic group is and how they should be catered to by established and emerging D2C brands.
Moreover, D2C brands must realize how the change in consumer behavior is rapid.
Most recently, McKinsey’s ConsumerWise update for April 2023 shows that 4 out of 5 US consumers shop at different stores to get better deals and choose smaller pack sizes to save money. In addition, across age and income groups, spending has converged, showing just how volatile and unpredictable the consumer can be.
Following some divergent spending patterns when the pandemic was at its worst, spending behavior has generally merged across socio-economic groups.
Source: McKinsey 2023
Maintaining your retailer partnerships as a new D2C brand is a balancing act
On average, a D2C brand will have its products in more than 1,000 official resellers and retailers and on multiple marketplaces and comparison shopper engines (CSEs).
This shows that brands can add a successful D2C lane to their income channel.
It also shows how important it is to effectively manage your reseller and retailer partnerships while meeting the needs of customers who choose either channel to shop from.
As mentioned above, most brands will have an overall view of all retailers selling their products. However, most of them will have a closer look at the bigger retailers as their prices will have the most impact on product perception. Also at play is the price rank the brand wants to achieve in relation to its retail prices.
Usually, it won’t be the first or second cheapest as brands will never want a lower price that insults retailers.
On the consumer’s side, when buying directly from a brand, they are often willing to pay more than at a retailer. However, a brand will want to stay competitive by not choosing to be the most expensive choice as well.
The best way to make the customer and one’s retailer partners happy is by diversifying and curating each channel’s product offering.
Although a brand may eagerly want to drive sales through its new D2C channel, offering retail customers new or unique products is how it keeps the lights on.
New D2C brands may release new products more strategically, either choosing to withhold or allow retailers access to exclusive products simultaneously or before a release through their D2C channel.
What role do marketplaces play?
This depends on the brand. Some are selling on marketplaces, and it is a vital channel for them in terms of customer acquisition, awareness, and driving revenue. It can also be a shortcut for internationalization.
However, when it comes to luxury brands, marketplaces will not be their preferred channel. The intricate details of the overall shopping experience play a larger role in luxury purchases.
Curating one’s product offering also opens a brand up to new customers, pricing strategies, and pricing challenges that must be met to ensure profitability.
As discussed in Omnia’s D2C predictions for 2023, pricing for an omnichannel strategy may not always mean consumers get a lower price when shopping through D2C. However, if a brand has the correct tools and strategies in place, the price will keep it competitive.
USPs of D2C brands that work as opportunities
Place and innovation
Unlike traditional brick-and-mortar stores, the place does not refer to a physical location or address. Today’s D2C brands, often known as disrupters or challenger brands, have done exactly that–disrupt where a brand operates.
By simply choosing to develop a D2C e-commerce strategy before opening a store, brands have put innovation at the forefront of their identity.
For example, Gymshark, a London-based sports apparel brand, started online and opened its first store after achieving global success. The influence and power of giant retailers can only go as far as their willingness to innovate and evolve.
Customer experience and personalization
As a brand creator and owner, one must fully own the responsibility for providing the ideal customer experience, including the smaller, often overlooked details.
For example, after a successful online purchase and delivery, the post-purchase experience is just as important in solidifying a returning customer. Sending a follow-up email with an opportunity to review, log a return, and a sincere thank you goes a long way in gaining customer loyalty.
Beauty and skincare brands that conduct an online quiz about a shopper’s biggest skincare concerns can feed two birds with one scone. They gain customer knowledge while offering valuable incentives (free samples of new products catering to the quiz’s results).
The customer feels taken care of and that the brand has a genuine interest in what they are looking for.
Price-related goals and controls
A brand that sells to and relies on its B2B retailer partnerships has little commercial oversight over what goes on in-store.
If giant marketplaces like Amazon and Walmart are also part of a brand’s B2B network, it will become increasingly less independent as these domineering partnerships make changes or create new rules.
For example, Amazon announced in March in an email that it was severing its relationships with third-party distributors to source directly from brand owners. A D2C strategy, however, gives brands more autonomy.
Source: Insider Intelligence
E-commerce pricing challenges a D2C brand may face
Before developing a pricing strategy for your D2C channel, it’s vital to consider a few things that may pose challenges. This may include competition, insult pricing and price elasticity, and price organization.
Because of the mass migration to D2C, brands will naturally face increasing competition. Developing a detailed and comprehensive pricing strategy is crucial to meeting commercial goals, having updated prices that keep a brand competitive, and utilizing time more efficiently.
As competition increases and the market gets saturated, such as in the current beauty industry, pricing-related challenges may pop up.
- Competitor brands: Your brand or product will compete with others that may be similar in features, quality, functionality, or popularity. From this, brands use reference pricing to find a comparable product from competitors.
- Your reseller or retailer network: Brands should never want to undercut their retailers, as a large portion of their income will come from them.
A retailer who may be a part of your network will likely not be aggressively competitive as they do not need to compete with your extended network. However, they may want to keep an eye on your prices and align if necessary.
- Product lifecycle and cannibalization: When it comes to the product lifecycle of your assortment, you don’t want to decrease your sales by cannibalizing your products.
In this sense, a brand’s innovation and evolvement could be its own competition, making automated pricing necessary for the product lifecycle regarding promotions and seasonal pricing.
- Market developments: Maintaining or building robust market share, especially if your assortment is within a competitive category, does not count as direct competition.
However, it certainly adds to how ambitious a brand needs to be if gaining market share is a goal. If a scale-up brand is looking for venture capital from investors, market share is going to need to be a focus.
Insult pricing and price elasticity
Simply selling at the recommended selling price (RSP) for the full product lifecycle in your D2C store is unacceptable for consumers in today’s market who expect promotions and discounts at some point in the cycle. This is called insult pricing, which is not desirable for a brand.
Transparency online is high, with consumers enjoying the ease of comparison shopping and price checking on Amazon, Google Shopping, and others.
Price elasticity is another vital subject that brands should know before setting a pricing strategy.
What is price elasticity?
Price elasticity is the percentage change in demand divided by the percentage change in price for a specific product. The result of this calculation is referred to as the price elasticity of demand (PED) for a specific product or service after a price increase or decrease.
It enables you to better understand consumer decisions and the scope and calculation effects of price increases and reductions.
But it’s not as simple as it sounds.
For a D2C brand, it is crucial to understand the setting and the channel a consumer is operating in. For example, if looking for a product in the environment of a comparison shopping engine (CSE), the price elasticity will be naturally higher than when a consumer visits the brand’s website directly.
As this usually implies the customer wants to benefit from the whole experience, which may include loyalty programs, curated services, high-end packaging, and more.
Furthermore, according to Prof. Joel Dean, author of “Pricing Policies for New Products” in a Harvard Business Review article, price elasticity is also an accurate gauge of where your company is in its maturity, a concept he breaks down further into three distinct elements.
Elements of price elasticity maturity:
- Technical maturity: This is indicated by a declining rate of product development, increasing standardization or commoditization of features and performance among brands, and stabilization of customer expectations as a given product spends more time in the market.
- Market maturity: This form of maturity is indicated by consumer acceptance of a given product, its service idea, value proposition, and the stabilization of the belief that it will perform satisfactorily.
- Competitive maturity: This is indicated by the stabilization and entrenchment of existing players and brands, their market share, pricing, and positioning as a product continues to exist in the market.
When it comes to brand internationalization, having various local approaches and tools makes executing your intended commercial strategies around the globe more complex and time consuming. It may also prevent your teams in various locations from sharing best practice rules and learning as a cohesive pricing team.
Unfortunately, pricing is not always organized or recognized enough as a vital focal point. When it comes to the organization of a pricing team, the biggest challenge is time. Everyone who works with prices must have access, training, and an understanding of what’s happening. The different roles must be on board and be open to learning.
Using the RASCI matrix system, a D2C brand can streamline, organize, and strengthen its pricing knowledge and team:
The RASCI matrix system involves:
- Responsible: Who needs to make sure the project reaches completion?
- Accountable: Who has ultimate control over the project and its resources?
- Support: Who will provide help to the responsible team members?
- Consulted: Who will advise the responsible team members?
- Informed: Who needs to be kept in the loop at every stage of the project?
How to create e-commerce pricing strategies for D2C brands
Use this simple guide for developing a pricing strategy that fits your product, its position, and your future goals:
Source: Omnia Retail
When creating a pricing blueprint, there are several strategies and tactics one could use. Developing a comprehensive pricing strategy requires starting with your commercial objective to end up with high-level of automation.
A frequently used practice in D2C pricing is offering curated accessories or individual items in a bundle. The challenge here is optimizing bundle pricing. Many players currently use a high-runner bundle strategy with product overlap, combining products often bought together. For example, a clothing brand may sell scarves and beanies together, or a men’s clothing brand may bundle socks and underwear together under one price.
Product line pricing
Here, a brand prices a single product line based on various characteristics in the line. For example, one color will have the base price for products with different colors, and the rest are adjusted from this price. The less popular colors tend to be slightly cheaper.
Brands want to stay competitive in the market and have data insights from the products of their close competitor brands by using the prices of other well-known brands to determine their own recommended retail price (RRP) or even their selling price.
Showing how other GTINs are priced in an assortment report gives the client a better market overview of what is happening with products.
Source: Omnia Retail
Understanding pricing requires commitment
As the old saying goes, practice makes perfect. Garnering pricing knowledge cannot take place overnight, but the triumphs and mistakes of a trial-and-error approach go a long way in developing pricing maturity.
If brands, especially those new to D2C or contemplating moving in that direction, can prioritize pricing from its earliest days, the benefits are endless. A more robust understanding of the market, a deeper knowledge of the changing consumer, and how agile to be when balancing it all are at stake.
Every pricing project is individual, but the more you know, the more time you invest, the more mature your pricing background will become. As this article has discussed various aspects of pricing, it is not only about putting a number on a tag. It requires the creator behind a brand to be insightful, creative, and strategic.
When you’re done creating a winning D2C pricing strategy, take the next step into D2C marketing.