Thursday, November 10, 2011

What Price is Right?

This is part 6 of a 6 part series by Mark Capps on his experiences of leaving Google to start up Sneaking Duck, an online eyewear retailer. Click for parts 1, 2, 3, 4, 5. It was originially published in Power Retail.

Pricing is one of the most important decisions about a product as it encapsulates so much - it’s a driver of customer demand, of margin, of brand values, of strategy and more.

We spent a lot of time thinking through our pricing before launch. Now we have feedback, we can start working out if we did things right. I’ve shared below the thinking behind our pricing decision, and what’s happened so far. Please share your views on how we’re doing.

Current pricing rationale
We charge $180 for a pair of glasses, including coated lenses, case and cloth. The price for each subsequent pair is $90. If your prescription requires ultra-thin lenses then we charge an extra $60, and if you want frames-only, we take off $20.

To get to these prices, I built a financial model, did plenty of competitor analysis, talked to a few experts and - most importantly - spent time with my co-founders working through our strategy.

Our intention is to be:
  • Straightforward, simple and fair
  • Priced to make owning multiple pairs a great deal
  • Better value than offline
  • Make a reasonable margin (i.e. share the cost benefits of being online with our customers)

Straightforward and simple.,
Some companies advertise a seemingly great deal on the window, but when you get the receipt, extras like coated lenses have dramatically bumped things up. We have deliberately decided to avoid this trick and be straightforward. For the same reason, we have ‘whole’ numbers, instead of using the 179.99 trick to give the illusion of cheaper price.

The only price variations we have are for ultra-thin lenses (which cost us a lot more), and a reduction for frames-only. For these decisions, we used a financial model to keep margins close to constant.

Multiple pairs
Our brand is all about sharing the fun we all experience of mixing and matching frames with outfits or moods. Given that many of our costs are per-order, not per-frame, we’re able to offer the second pair at significant discount whilst still keeping a reasonable margin.

Costs that are per-order are: shipping, customer acquisition marketing, website operations & maintenance, order processing, customer relationship management, some packaging and the cost of returns. We outsource the actual lens stock and fitting, so our order processing is mostly by-order – things like ordering from the supplier, delivery to and from etc.

Better value than offline
This is tricky - do we compare ourselves with designer frames that can cost $500 to over $1,000, or to Specsaver’s budget range? With whom do we want customers to compare us?

We consider our designs to be at least as cool as some of the most expensive frames, however our brand isn’t yet established. Additionally, our philosophy isn’t to maximise brand return, it is to price reasonably such that people can own multiple pairs.

We opted to go for a price that is always cheaper than anything but the most budget in-store pairs. This also aligned with what we considered to be a reasonable margin. What is challenging though, is making a fair comparison - e.g. 2 pairs from us costs $270 including coated lenses. Specsavers looks cheaper at “199 for 2 pairs”, until you realise that you have to pay $50 per pair for coatings. Also, we think our designs are much more interesting.

What we’ve noticed
Feedback from customers and non-customers varies enormously, but the average settles at ‘reasonable’ to ‘very reasonable’. However, a couple of people have noted that they’d be more inclined to purchase if the first pair was significantly cheaper. One person said that $180 seems expensive compared to $90 for the second pair. Others have noted that if you’re not pricing on a par with the Big Name brands, you’re not considered as an equal brand. Our sales data suggests we’ve done well on the multiple pairs philosophy as most sales are for 2-3 pairs.

Since launching we’ve talked internally about our pricing quite a bit - is it right? Is the philosophy right? I’d really love to hear your views!

Image credit.

3 comments:

  1. Hi Mark,

    Really interesting post. I am of the view that the first pair does seem expensive compared to the second pair. My assumption would be that given you make some margin at $90 you must be making a huge margin at $180 even allowing say $20 per pair saving in combined costs. I do think it's worth making more of what these savings are to justify the huge drop in price for the 2nd pair.

    Perhaps it's worth testing phrasing the same pricing differently:

    i.e. rather than saying "$180 for 1 and $90 for more", you could try "$180 for 1, $135 each for 2, $120 each for 3 etc".

    The total price paid is the same but the discount is split between all items in the order rather than just pairs 2+.

    I realise the above does lose the simplicity of your current offer though. Given that the price paid is essentially the same it should be possible to A/B test it without too much trouble.

    Cheers - Andrew

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  2. Hey Andrew,

    I very much agree with your point on testing messages - whether to price at the average, or marginal cost. Another way to express the same maths is 'buy 2, get 1 free'.

    Margins - one thing that's happening here is exactly how to allocate costs. Perhaps counter-intuitively to some, I am fully allocated many costs to the first pair. For example, the marginal cost for postage for a second pair is zero as the postage satchels we use are good for 1kg when a complete pair of glasses in a case weight ~0.25 kg.

    However, the point that has been the most surprising thing to me on this post (on Power Retail) is that some people make purchase decisions based on their guess of the value to the seller, not just based on their knowledge of the value to them. It suggests that these customers would be more likely to buy from us if we INCREASED our price for the second pair, especially if we gave the impression of impossibly low margins. Our philosophy is to be fair and transparent, so we certainly won't engage in any deception on margins, however perhaps we should look at reducing the price of the first pair and increasing it on the second by allocating more costs to the second.

    Another pricing 'trick' of this sort is pricing at odd numbers - e.g. $176.57 - the psychology of this is that the exact numbers suggest that retailer is optimising prices to the cent to be squeeze margins to the minimum. I don't know how these prices are arrived at for other companies, but it seems unlikely to me that retailers would do this if it reduced returns.

    Overall, I believe that we will gain more customers than we lose by a straight-up pricing policy. However, I find it fascinating how these decisions can lead to all sorts of assumptions on the part of customers - inadvertently communicating something that you never conceived. This is something that I will certainly be keeping front of mind at all times.

    Mark

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  3. My understanding of having the second pair at significantly lower value than the first is that it's almost a no brainer to buy 2. Whereas if you were to split the price at $135 each, you would find more people only buying one pair.

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