When it comes to making purchase decisions, price is often the deciding factor. Several studies have shown that pricing is critical and relevant to consumer buying behavior. With so many options available in the world of DTC, getting your pricing strategy right can be a make-or-break moment for your business.
In this article, we’ll dive into 10 common pricing strategies that DTC brands can use along with examples of each. Keep reading to learn more!
What Is A Pricing Strategy?
Setting the best price for goods or services is a process known as pricing strategy. This method helps to level prices and margins according to market demand in order to boost profits and enhance shareholder value.
There are several things that need consideration when selecting your pricing strategies such as marketing aims, business revenue aspirations, target audience, brand placement, and consumer demand. An effective pricing technique will reduce expenses while creating value for your customers; thus assisting with the expansion of your venture.
A Few Things To Check Before You Choose Your DTC Pricing Strategy
- Know the total cost of your product
Before you set your prices, be sure to know the total cost of your product. If you order products, add up their cost per unit — that’s your cost of goods sold. When crafting each piece yourself, consider the bundle of raw materials you need and how much time it takes to create one item for sale. You can also take into account the following costs, so that your business turn out to be profitable:
- Production Cost
- Marketing Cost
- Shipment and Handling Cost
- Business Cost
- Identify your ideal customer profile
It’s important to note that your hard work won’t amount to anything if you don’t have any buyers.
It pays to think about your customer’s disposable funds. Some may search for the best bargain, while others have no qualms with parting ways with a few extra dollars if it means getting something of quality. Understanding these preferences will give you a better footing in gauging what prices to offer in order to maximize customer satisfaction!
Thus, it follows that you must calculate a value-driven profit margin, so your product is attractive to the desired target market and makes financial sense for you as well.
- Find your USP/value proposition
What sets your business apart? Finding the perfect pricing strategy is key to highlighting the unique value you’re offering to consumers. Take the story of Tuft & Needle for example: they carved out a special place in the mattress market with their affordable prices and exceptional quality. Similarly, find what sets you apart, and let it guide your pricing decisions to make sure no one has any trouble recognizing how unique your business is!
10 Common Pricing Strategies Used By DTC Brands
Competition-based pricing strategy
As the name suggests, competition-based or competitive pricing strategy is based on understanding competitors’ prices and using them as a benchmark. Customers often compare prices when making their purchase decisions, making small price differences crucial for success in this type of market.
You can opt to go a few cents lower of the price your competitor is offering, offer the same as your competition, or exceed the prices of your competition to be in the game.
For instance, D2C brand Dollar Shave Club launched the first subscription-based business that sends fresh razors and other grooming products to your doorstep via email.
Yes, a D2C startup came onto the scene, took on a global brand like Gillette, and won with a quality product and a competitive pricing strategy. In fact, Dollar Shave Club eschewed the traditionally high margins on razors and delivered them at a competitive price.
Cost-plus pricing strategy
A cost-plus pricing or also known as the markup pricing strategy involves charging customers a price that is higher than the cost of producing the good or service.
Cost-plus pricing can be effective when there are high fixed costs associated with production, such as manufacturing materials and labor. By charging customers more than these costs, businesses can increase revenue while limiting their exposure to price risk and market fluctuations.
For example, let’s say you started an online shoes business and want to calculate the selling price of one shoe:
- Material Cost: $50
- Labour Cost: $200
- Shipping Cost: $10
So now, the cost of your product will be $260. Now, you can add a 45% markup of the total cost of the product to have a profitable business. The formula, then, for the total price of the product would be:
Total production cost ($260) * Markup (260*45/100) = Selling Price of your product ($377)
Value-based pricing strategy
Value-based pricing strategy is when the price of a product or service is based on its value to the customer, rather than on the costs incurred to produce it. Businesses show the product is premium and exclusive for buyers.
In a value-based pricing strategy, price is set high enough to cover costs (including variable costs and overhead), but competitive enough so that customers feel they are getting a good deal. This approach may be more effective in competitive markets where customers can switch providers easily.
For instance, fashion lifestyle brand Ralph Lauren often follows a value-based pricing approach.
Price skimming strategy
This E-commerce strategy refers to the business tactic of starting off at a high price in order to satisfy consumers who don’t mind paying extra for its products. As other businesses start to join the market, then reduce their prices in order to entice a new, more budget-conscious customer base.
For instance, Apple is a brand that uses a price skimming strategy, especially during the launch of its latest iphone. It starts off at high prices and slowly lowered prices over time to attract budget-conscious consumers.
A skimming pricing strategy can be a great way to make a lasting profit from your products, but it can also backfire. If you lower the prices too much, consumers who paid full price may get irked and competitors will sense an opportunity to swoop in and imitate your ‘fake’ margins.
Penetration pricing strategy
Contrast to skimming price strategy, the penetration pricing strategy is when the company sets a low price for its new product or service to gain customers’ attention and raise awareness.
It is also known as the discount pricing strategy and works best for price-sensitive customers but is not sustainable in the long run for businesses. This strategy is usually best for brands that are new in the market and want to attract customers. However, there is always a risk of losing those customers once the business increases its prices back to normal.
Pro-tip: To truly make an impact with your product, emphasize its value instead of the price tag.
Netflix pulled off one of the greatest feats in pricing strategy history with their ‘penetration pricing’ model: charging a low fee for access to their instant streaming service with subscriptions, they boosted their customer base exponentially and gained an unbeatable market share. In doing so, Netflix managed to establish a monopoly over the industry.
Psychological pricing strategy
This marketing strategy has been used by businesses across various industries to optimize pricing and boost sales. It does exactly what the name suggests – targets human psychology to increase sales.
Take example of the 9-digit effect. Customers see a product worth $99.99 as attractive and a good bargain even though the price is almost the same as $100. The “9” makes all the difference in perception.
Apart from this, a BOGO offer or changing the colors and fonts of the pricing tag have also proven, in various stances, to be effective.
For instance see how Indian D2C brand BoAt uses the psychological pricing strategy to up its sales:
Credit: Boat Website
Keystone pricing strategy
Keystone Pricing is an approach that involves setting a price for a product or service that is double the cost of production (or the wholesale price). This method can help businesses maximize their profits while also keeping prices competitive and attractive to customers. It is usually used by retailers.
Here’s an example to help illustrate the concept. Let’s say a company produces a product with a cost of production at $100. Using keystone pricing, they would price that product at $200 – effectively doubling their investment with a 50 percent markup!
Bundle pricing strategy
A bundle pricing strategy involves selling multiple products or services together at a discounted price (than the total amount of all the products individually). This allows the business to increase their revenue by selling more products per unit than if each product was sold on its own.
Let’s understand this with an example – a combo meal from Mc Donald’s. The combo includes small fries, a small drink, and a burger. If the customer only wanted the small fries they would have to pay some extra for it separately. However, if the customer buys the combo meal consisting of all 3 items, then they can keep all 3 items for a discounted price.
This strategy is effective because customers value having multiple products in one package more than paying extra for each product individually.
Anchor pricing strategy
Anchor pricing is a product pricing strategy that businesses use to create a favorable comparison between their discounted prices and the original prices. This way, consumers can quickly and easily see the savings they’ll get when they make their purchase. The comparison can also be between the price of your and your competitor’s product.
One way businesses show this is by cutting the anchor price prominently and displaying the discounted price near it! You can find this strategy being used by many businesses, in the malls, and on online marketplace such as Amazon.
Credit: Ring Alarm
Economy pricing strategy
An economy pricing strategy is an approach that involves pricing your products low and gaining more revenue through higher sales volume. This type of pricing works particularly well for commodity goods like groceries, drugs and medications, etc. where there isn’t a lot of brand recognition.
This business model relies on regularly introducing new customers to the product in order to generate the desired revenue.
Again, Dollar Shave Club is the perfect example of a D2C brand utilizing economy pricing, as they outrun Gillette and their pricey razor blades.
Find The Right Pricing Strategy For Your Business
There is not one single way of establishing a successful pricing strategy; what works for one D2C business may not be ideal for another. Therefore, doing a thorough research and figuring out which method is right for your product, marketing plan, and buyers is essential.
With the knowledge gained from this article, you can make sound decisions and find the optimal pricing to provide customers with an enjoyable shopping experience.
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