You may be surprised to learn that lowering your price might actually help you yield higher profits.
A Winning Strategy in a Changing E-Commerce Landscape
If you’re a DTC business, you need to be strategically testing your prices.
Companies selling direct-to-consumer (DTC) are feeling the heat these days. In the rear view mirror are the good times of 2020 and ‘21 when consumers’ wallets bulged (thanks stimmys!), marketing costs yielded high returns, and margins were healthy. Since then, we’ve seen a series of shocks to the system:
- It costs more to acquire new customers because of the move to iOS 14.5 and the corresponding blunting of targeting and attribution difficulties.
- Supply chain disruptions and the massive increase in container costs leading to increased price inflation.
- Fiscal and monetary policy tightening, leading to more expensive financing and higher costs of goods across the supply chain.
- Changing consumer behaviors as a result of recession fears, inflation in everyday goods, and a “return to normal” from COVID that means consumers reprioritize spending on travel and experiences like going out to eat.
All of this means that DTC companies are in a tough spot. It costs them almost 100% more to operate the same business that they did before. Margins are thus significantly tighter, meaning the future of many of these DTC companies is not as clear as it was before.
Step 1: Understand Your Goal
The first step as a DTC brand is to figure out your goals, or your appetite to trade off one positive outcome for another. In my experience, brands are primarily focused on growing revenue and profit, but when confronted with the tradeoff to grow just one or the other, they are unsure. And to be fair, most likely this is a pendulum swinging between optimizing for growth or optimizing for profit.
In times like these where interest rates and costs are high, most brands should probably be focused on maximizing profit. For a brand just getting started, they may consider revenue growth to be the North star, and that’s also understandable. But it’s important to understand which of those applies, and why.
Step 2: Don't Just Say it, Do it
OK - so vast majority of brands these days say they are interested in maximizing profit, yet their actions speak otherwise. They measure return-on-ad-spend (ROAS) based on revenue, not profit. They offer steep discounts to drive up average order value (AOV) and conversion while cutting sharply into their margins. They offer free shipping because they believe they “need to” when in reality it’s likely a costly miscalculation.
The three things you MUST do are:
- Calculating ROAS using gross margins
- Measuring lifetime value in profit, not revenue
- Understand how the economic levers of your business (like intro offers, discounts, free shipping, and marketing spend) are all affecting your bottom line.
Step 3: Take an Analytical Approach
Let’s say you buy the argument that your discounts may not be helping your bottom line as much as you think. Or you think that raising price would certainly help your margins, but at what cost to conversion and volume? Could it even be possible to get more profit with a lower price? The answer is a resounding “YES!”
You can test all of these things! Intelligems was built for the sole purpose of helping DTC companies get a grasp on their economic drivers by A/B testing them. Not guessing, not making a change and comparing week over week. We’ve worked with dozens of companies that have found higher profit by lowering prices. We’ve also worked with others that found it by raising them! Many of our customers found that offering free shipping is a major drag on economics, while others found that the right threshold, i.e. free shipping over $75, can profitably boost AOV.
Your discounts, prices, and shipping fees are too important to not be testing. In a dynamic economic landscape where inflation is soaring and consumers are ruthlessly reprioritizing their spending, you need to be constantly testing to find the optimum.
Step 4: Never Stop Testing
Just like you never stop trying to improve your paid social strategy, your economic levers are always in flux. Just because you found what works today doesn’t mean it’ll work in 3 months from now. We are in one of the most dynamic environments since the dawn of ecommerce, and the competition is only getting more sophisticated and smarter. If you don’t keep up, you’ll certainly get left behind.