How Dynamic Price Optimization Makes It Easier for DTC Brands to Profit
As a retailer, profitability has long been the ultimate goal and, as fundraising has become more expensive, getting to profitability as quickly as possible is key for many companies survival. We’ve firmly moved from a place of ‘Growth At All Costs’ to “Profit or Perish’ and no other type of business is left more in the lurch than direct-to-consumer (DTC) brands.
Born in the golden era of e-commerce, success for many DTC brands has been measured against a different yardstick, that of growth. As a result, DTC retailers have prioritized strategies and actions that support customer acquisition, sometimes at the expense of profitability. Seemingly overnight the pendulum swung to profitability at all costs - and this has left many DTC brands scrambling to revise strategies and processes to support stronger margins. For many, pricing strategy has emerged as a key area of opportunity.
But how does one go about pricing in DTC? Assessing your customers’ willingness to pay is not a simple survey question. A/B tests are expensive with the best results yielding the wrong price 50% of the time. Price scraping from competitors isn’t an accurate comparison of the product nor the customer. The industry is overdue for a solution to the pricing problem.
Introducing Dynamic Price Optimization. The first of its kind, Spresso’s modular SaaS solution uses AI, machine learning, and advanced analytics combined with first-party data to increase SKU-level profitability without sacrificing conversion. In this blog, we’ll discuss the benefits of Price Optimization and why it’s an essential tool for DTC brands to improve profitability.
Drive Profit and Conversion
Profit and conversion exist on a spectrum. Price Optimization puts the power in your hands to determine precisely where you fall on that spectrum. Many retailers will choose to set a pricing strategy that maximizes profit while maintaining conversion, effectively answering the illusive question, ‘what is my customer’s willingness to pay?’
Optimization takes place at the SKU level, which unlocks important insights for DTC brands, as pricing individual products can be an extra challenge when there is no true comparison in the market.
Furthermore, DTC businesses do not have the same team resources as Big Box retailers, so whether increasing margin is a challenge posed to finance, merchandising, e-commerce, or a combination thereof, pricing challenges have historically stemmed from teams’ lack of adequate tooling and resources.
Use of First-Party Data
Actioning first-party data is best practice. Not only because of data privacy laws and cookies are being phased out (making third-party data unreliable), but rather because it is the only way to assess your customer base and their willingness to pay. For example, your customer base might be more tolerant of a higher price because they receive free returns, whereas your competitor does not offer free returns on similar products.
This is precisely why our Price Optimization solution allows DTC brands to use their own first-party data when setting prices. First-party data enables businesses to tailor their pricing strategy to the preferences of their customers. This provides DTC brands with a unique advantage in the marketplace, as they can better understand the needs of their customers as they price products to maximize margin.
Dynamic Real-Time Pricing
Another key benefit of Price Optimization is its dynamic, or real-time, modeling. Historically, trying to action stale data has been a challenge when determining pricing strategies. With Spresso’s module, the retailer sets a minimum and maximum price for the product, and the multi-armed bandit, the foundation of the Price Optimization solution, dynamically serves five equidistant prices to consumers visiting the site.
The solution is able to find the right price quickly, typical timelines range from a few hours to a couple of days, and routes a majority of the traffic to the best-performing price point while keeping a minimal traffic amount allocated to other price points. This is called ‘exploration’ - it is essential as it allows pricing to adjust to the rapidly changing market, whether it be consumers’ tolerance for a higher price or lack thereof. The business isn’t reliant on cumbersome manual processes for pricing.
Spresso’s Price Optimization solution offers a fast return on investment (ROI), with most DTC businesses seeing the resulting increase in profitability in days or weeks. This is partly due to the ease of implementation of the solution. With only three inputs needed, most are able to get up and running in a few weeks, sometimes even faster depending on the business’ resourcing.
Furthermore, the console is easy-to-navigate and intentionally designed for a non-technical user. Once the technical lift associated with implementation has been addressed, there is no more development time required. This allows the merchandising, or e-commerce team, to set min and max prices within the console and it’s off to the races!
The second reason for fast realized ROI is the rate at which the multi-armed bandit (MAB) is able to hone in on the right price. Unlike an A/B test where the ‘wrong’ price is served 50% of the time, the MAB minimizes regret, serving the best performing price quickly, within hours. Even in a testing scenario with price optimization being applied to a few SKUs, a merchant is able to see the ROI of the solution.
In conclusion, the retail landscape has evolved with profitability front and center. Dynamic Price Optimization can be a DTC brands’ secret weapon in navigating the migration from growth to profit. With the ability to action your data to assess your customers' willingness to pay, Dynamic Price Optimization is the essential tool that DTC brands need to improve profitability and stay ahead of the competition. Don't let outdated pricing strategies hold your business back. Embrace Dynamic Price Optimization and unlock the profit in your data!