Setting Your Online Price With the Future in Mind
For those of you who are launching online first and recognize that traditional retail is definitely in your future as you try to scale, a nagging question may arise: should I price online, assuming that in the future I’ll need to accommodate retailer, distribution margins and eventually broker’s fees?
The short answer = yes.
Long answer = you need to price high per unit for any online launch because online purchases of new brands constitute specialty purchasing. Consumers view direct-to-consumer websites right now as specialty retail outlets. The reason for this is that this is the precedent that was set up in the beauty industry 25 years ago, and by certain other categories, like chocolate retail outlets like Lindt. These chains and brands have created a cultural assumption that brands that run a retail site or have a retail presence, whether it’s online on my screen or 3D in the shopping mall, are high-end luxury premium brands. That’s the assumption we’re making when we go to a branded website to buy something direct.
The consumers who seek out DTC goods are therefore not very price-sensitive.
And these are the only consumers you want initially to run a cash-efficient business.
I talk about a data-science-driven range of 50% to 200% over brick and mortar retail category average unit pricing in my book. This is the sweet spot for pricing, and it gives you a nice range to work with in terms of pricing very high initially online. And you should push the limits of sanity with online launch pricing.
Primarily, you want to build the early business on the wallets of price-insensitive consumers most likely to repeat habitually. So, you have very little to lose by overpricing the market on your DTC because it’s so easy for you to change the price in five and 25-cent increments and see what happens after three months. Online selling allows rigorous, free pricing experimentation. If you have the budget for paid ads, see what happens to the paid ad ROAS when you start moving that price down in increments.
So price super high on DTC and experiment. Remember, it doesn’t take many users who are perfectly selected and become repeat buyers of a DTC business to create a million dollars of trailing annual revenue. It just doesn’t take a lot of people.
But there’s another reason to price high for an online launch. You will most likely need to use 3P distributors to get to high-value brick chains in the future. Even though it’s becoming possible to get to Phase 2 online and then jump to Target or Costco/specialty and scale from there, you can’t necessarily rely on being able to sell ONLY to direct ship retailers when you head into brick retail.
So, you need to price high enough early on in the life of the business to allow for margin compression when entering third-P brick distribution. Otherwise, you will see your wholesale price collapse when servicing 3P distribution retail outlets. You could literally end up making 5, 10, 20 cents per unit max, which is simply not viable without massive amounts of funding.
Price high. Be brave. You can always lower it later.