What is DTC?
In the eCommerce market, Direct-To-Consumer (DTC) models have emerged as a powerful disruptor – changing how businesses operate and interact with their end customers. Unlike traditional retail, where products often pass through a series of intermediaries, DTC brands sell directly to their consumers.
And consumers are buying. A report from IAB UK found that 97% of the UK's online population recognises at least one of the top 50 DTC brands. Of those, 39% reported making a purchase from them. This digital-born retail trend, represented by brands like Bloom & Wild and Gousto, is being propelled by an affluent and influential consumer base that values personalisation, convenience, and ethical sourcing.
As you can imagine, this creates a unique opportunity for the brand to establish more of a direct relationship with its customer base. But it also requires them to implement a pricing strategy to remain competitive and profitable as consumers become increasingly price-sensitive.
Whether you are currently implementing a DTC model or looking to transition towards one soon, understanding the DTC pricing strategies at your disposal is vital if you want to compete. In this guide to DTC pricing strategies, we’ll go over the different avenues you can explore to optimise your brand’s pricing model and maximise profits.
Why DTC Pricing is Unique
DTC (Direct to Consumer) pricing is unique in that it requires brands to think differently about their pricing strategy. This isn’t like traditional retail, where the markups help cover costs associated with wholesaling and retailing products through a third party.
- Absence of Middlemen: Traditionally, products traverse through distributors, wholesalers, and retailers before reaching the consumer. Each step adds a markup, affecting the final price. In contrast, DTC brands take charge, eliminating these layers. This grants them more freedom to decide their price points while often achieving better profit margins.
- Direct Interaction with Customers: A key advantage of the DTC model is its direct communication with customers. This allows for real-time feedback, empowering brands to adjust their pricing strategies more swiftly based on actual customer responses. It's an agility that many traditional models simply can't match.
- Exclusive Branding Opportunities: DTC brands can create niche branding and premium products as they control their narrative from production to sale. Whether it's a high-end product justifying a higher price tag or a competitively priced offering to undercut mainstream alternatives, DTC brands possess unique flexibility in positioning their products in the market.
Given these distinctive characteristics, DTC pricing isn't just about slapping a price tag on a product. It's about strategically understanding your brand’s value, assessing the market, and determining how best to present that value to your customers.
Top Pricing Strategies for DTC Brands
So, how can you ensure that your DTC business pricing strategy hits the mark? We've outlined common approaches that have proven successful for many of our clients.
Cost-Plus Pricing
At its core, this is one of the simplest pricing methods. Determine the cost of producing your product and add a markup percentage that represents your desired profit margin. For DTC brands, without the traditional middlemen markups, they can often afford to set competitive price points while retaining good profit margins.
Consider a DTC brand selling handmade, organic skincare products. They calculate the total cost of ingredients, packaging, and production for a bottle of face serum to be $10. By applying a markup of 100%, they price it at $20. Given that there aren't traditional retail markups, this allows the brand to offer a quality product at a competitive price, yet with a healthy profit margin.
Value-Based Pricing
This strategy goes beyond just costs and focuses on your product's perceived value to consumers. By conducting market research, surveying customers, and analysing feedback, DTC brands can set a price aligned with the value consumers see in the product. It's a dynamic strategy that capitalises on the direct relationship between the brand and its consumers.
A DTC sneaker brand creates shoes using sustainable materials and ethical practices. They find out through surveys and customer feedback that consumers are willing to pay a premium for eco-friendly products. Even though the production cost might be $50 per pair, they could price it at $150, aligning with consumers' value on sustainable and ethical fashion.
Competitive Pricing
The digital nature of most DTC brands makes market analysis a must. By actively monitoring competitors’ prices and market trends, brands can adjust their prices accordingly. However, it's essential to strike a balance to avoid underpricing and devaluing your brand or being outpriced and overlooked by potential customers.
A DTC brand selling artisan coffee beans notices that most competitors sell similar beans for around $20 per pound. However, their unique selling proposition is a special roasting process that enhances flavor. They decide to price their product at $23, slightly above the competition, but justified by their unique value offering.
Penetration Pricing
Ideal for brands new to the market, this strategy involves setting a lower initial price to attract customers and gain market share rapidly. Once a loyal customer base is built, brands can consider increasing prices, ensuring they effectively communicate the rationale behind such changes.
A new DTC fitness apparel brand enters a saturated market. To make a mark, they introduce their line of leggings at $30, whereas most established brands sell for $50. As they gain customer trust and build a reputation for quality, they gradually increase the price to $45, still providing value but with an improved profit margin.
Skimming Pricing
Opposite to penetration pricing, this strategy is perfect for innovative, high-demand products. Brands set a high initial price, capitalising on early adopters willing to pay a premium. As the market matures and competition increases, prices can be gradually reduced to appeal to a broader audience.
A DTC tech company launches a unique, next-gen smart home device. Knowing that tech enthusiasts are keen to get the latest gadgets, they initially price the product at a premium. As similar products start entering the market and the initial buzz wanes, they reduce the price to attract a wider audience.
Bundle Pricing
Encourage more sales by offering sets or bundles of products at a discounted combined price. Not only can this increase the perceived value and overall sales volume, but it can also be a strategic move to clear out older stock or introduce customers to new product lines.
A DTC cosmetics brand offers lipstick, mascara, and eyeliner individually priced at $20, $25, and $15, respectively. They introduce a "Glam Pack" bundle, which includes all three products for $50 instead of $60 when purchased separately. This entices customers to spend more and introduces them to a wider range of the brand's offerings.
The Power of Dynamic DTC Pricing
There’s a commonly-held belief that in eCommerce, static pricing can be a brand's Achilles heel.
The pace at which market conditions, consumer preferences, and competition change can often outstrip the ability of a static pricing model to react. But with dynamic pricing, brands can make instant changes and anticipate demand by optimising prices in real time.
Using Technology and Data Analytics to Adjust Prices in Real-Time
The traditional method of setting and forgetting prices is fading into obscurity. With the rise of sophisticated technology and data analytics tools, DTC brands can now monitor a multitude of factors and adjust their prices almost instantaneously.
For instance, imagine a DTC brand that uses AI-driven analytics. As soon as it detects a surge in demand for a particular product, it automatically adjusts the price to capitalise on the heightened demand, ensuring optimal profit margins.
If there's a drop in interest or a surge in competition, the system can recommend or auto-adjust to more competitive price points, ensuring the brand remains a top choice for consumers.
Adapting to Market Changes, Stock Levels, and Seasonal Trends
Dynamic DTC pricing is not just about instantaneous reactions but smart adaptations. For example, a DTC swimwear brand can leverage data analytics to adjust prices based on seasonal trends.
As summer approaches, they might increase prices due to heightened demand. When summer ends, they could introduce discounts to clear out inventory and make room for the next season's stock.
Similarly, if a popular product is running low on stock, dynamic pricing can be employed to slightly raise the price, balancing demand with available inventory and preventing stockouts. What if a particular item has excess stock? Prices can quickly be reduced to stimulate sales, ensuring cash flow and reducing warehousing costs.
It all comes down to utilising data-driven insights to make better decisions in real time. This is what makes DTC brands so powerful, and why many established retailers are struggling to keep up with the competition. With a smart pricing strategy, DTC companies can stay agile and responsive – making sure they’re always one step ahead of the game.
Dynamic pricing also allows for further experimentation in price review - allowing customers to see different prices for the same item, based on personalised data such as location and past purchases. This allows retailers to target customers more effectively, create brand loyalty and increase customer lifetime value.
The Importance of Regular DTC Price Reviews
As the market's tides rise and fall, one element remains consistent: change. With the shifting landscapes of consumer preferences, competition, and global economic factors, a one-off pricing strategy can quickly become outdated, costing DTC brands potential profits and market share.
Brands can't afford to remain complacent by setting a price and then leaving it unchecked for extended periods. Regular reviews of your pricing strategy not only help you respond to immediate market changes but also anticipate future trends.
For instance, using tools like BlackCurve, DTC brands can automatically monitor, analyse, and adjust their pricing in alignment with the market's pulse. With its intelligent analytics, BlackCurve provides actionable insights, ensuring that brands are always positioned optimally in terms of price, irrespective of the market's volatility.
By regularly revisiting and refining your pricing strategy, you ensure that your products are always priced in a way that reflects their value, market demand, and your brand's overarching objectives. More than just a periodic check, it's an ongoing commitment to profitability and relevance in a competitive market.
Navigate Dynamic DTC Pricing with BlackCurve
Are you ready to implement the right pricing strategy for your DTC brand? BlackCurve is here to help.
Sign up today and learn how to leverage the power of intelligent pricing insights for your business. Together, we'll ensure that you're always one step ahead in an ever-evolving market.