The E-commerce Leader

[00:00:00] Jason: the trick with being a low price leader is not devaluing your brand
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[00:01:07] Intro: Hey folks. Welcome back to the e-commerce leader. The place to make you the best e-commerce data you can be today. We’re talking a microeconomics principle pricing, which is actually a huge topic. What’s your unpack it. We are going through the principles contained in Jason Miles, his book pricing power, simply call pricing policies available on Amazon.
[00:01:26] If you want to go get it. Totally suggest you do. I think it’s $2 99 and in dollars pounds will be even less for the Kindle edition, super cheap and full of great power. We are talking today particularly about penetration pricing, or low cost pricing and what advantages that might give you, and also some of the dangers as well and what you need to do if you can make it work.
[00:01:46] So really. Fundamental, critical to your profitability or not. So hope you enjoy the show. And do you take notes as you go, if you want to find the next we’ve taken do you come over to the e-commerce leader.com for our show notes as well? Enjoy.
[00:02:02] Jason: I think the third option we’re about to talk about is the most interesting of the three and the game that most people play. And this third idea, if I just jump into that is, is the idea of being the low price. , technically it could be called penetration pricing where you’re trying to take market share, by, having your price be structurally engineered to be meaningfully lower than the average as well as what most, the better or most, strong competitors pricing.
[00:02:35] And that penetration pricing, low pricing strategy. There’s a lot of gamesmanship or strategy associated with that. We want to talk through, , here in a moment, but that’s a, it’s an interesting thing to think about. Now we’ve talked about premium and now we’re talking about being the low price leader. So those are the two ends of the spectrum to your point, Michael, a few moments ago when new private label brands, sellers, for example, Try to launch a new product on Amazon frequently.
[00:03:03] They’ll try to play in this penetration pricing space. They’ll try to be the low price leader to gain bestseller rank, to gain reviews. That’s the common thing to go to market with. Most people don’t go to market with a new product and say, I’m going to price this twice as high as everything else.
[00:03:21] , most of them try to say, I’m going to price this lower than everything. , but there are risks and downsides to this that are obvious and problematic that we want to talk through. But anyway, so that’s the third idea. Is that being a low-price leader?
[00:03:35] Michael: I think a lot of people get a bit fooled by the, when they do premium price and they see the dollar signs in terms of the per unit economics.
[00:03:42] And I think that they can see the dollar signs of the penetration pricing when it’s done badly. Should we say. , in terms of the unit volumes. And I think that people get a bit full by public corporate strategy from big corporations that may be setting in the same places. They may be next to you on a Google results, or if you’re an Amazon, they might be selling next to your products.
[00:04:00] But if you’ve got Tesco or Walmart or Amazon, they can borrow it a large amount of money at one or even 2% a year. And Emerson’s case, at least it has been historically, probably higher now and they have public investments, so they have a massive amount of money. So profit and even cashflow does not have to be priority for them.
[00:04:16] And it does for most of us running our own smaller or smaller, medium sized businesses. So I would just caution that you need to, to your point, have a real strategy around this rather than falling into it, which is something.
[00:04:26] Jason: Yeah, totally agree. , and so then the question is, how do you do this? How do you do it successfully? How do you do, how do you become the low-price leader or engineer it in such a way that you can maintain that? And I think, , there are elements of that are created. , you can obviously be the low price leader any day of the week with short-term tactics and strategies.
[00:04:43] So there’s three or four of those that we could talk about here. , I’ll just rattle them off and we can, if any of them peak your interest, we can we can jump into them, but the first one is just run a sale. It was like, okay, that’s pretty straightforward. I’m the low cost leader today because I’m running a 25% off sale.
[00:04:59] So if the average price is let’s just do the math in our minds, $20. , and I’m taking a whack at it and I make my product $15 for three days or whatever. Am I going to be the low price leader? Yes. Is that sustainable? I don’t know. , so those are the things to think through. So a sale is simple and there are a lot of reasons you can do a sale, but there are other ways you can do this as well.
[00:05:21] , you can have, for example, what’s called a loss leader product. Now many retail stores do this. They have a. They have an item that they’re willing to sell at a loss because they know when you come to their store, you’re going to buy two or three or four other things that they have good margin on that loss leader strategy is something every e-commerce seller can do.
[00:05:42] I always talk to people about having a digital item that’s referred to as an ethical bribe to sign up for your newsletter list. When you set up a Shopify store, that digital item that’s given away for free is considered a loss of. It costs you something technically to have created it.
[00:05:58] So I think that’s a key part. The third thing you can do is, , you can create the ethical bribe. , as I just mentioned that, I guess that’s, , obviously similar, just build that and give something away for free. The fourth idea is to do a tripwire. A tripwire is a strategic.
[00:06:13] Front end low priced item that has a logical upsell. So a little bit of nuance there. It’s what’s a good example, similar remote control that needs AAA batteries and sell it for $3, but then sell the AAA batteries for $44. That, that kind of idea it’s part of a system that allows the customer to take a first step, but then the second step cost.
[00:06:37] And you balance strategically where you make money or don’t make money to get that system going. So those are a few ideas about how to become structurally a low cost leader.
[00:06:49] Michael: Yeah, this is great stuff. And I think that a lot of us in the Amazon focused world tend to over-focus on sales and short-term discounts.
[00:06:56] And I think that’s fine. As long as you’ve got a good reason for it. And B. It sounds obvious, but you add up the overall profit on that product line over the course of a year. I find it awful. Lot of people discount like crazy for black Friday, cyber Monday. , and that drives, , volume. It certainly gives customers great deals and it gives Amazon a lot of money.
[00:07:15] But, , a lot of the times I find a lot of people get less and less excited about that because they realize over the years, they don’t make much back to profit. So you got to have a really good reason for a sale. Not everyone else is doing it is in my opinion. And that if my more experienced clients, not a good reason, , the loss leader thing is great.
[00:07:31] I think on Amazon, it’s really hard to engineer the fact that you get people to buy one product and then cross sell to another one. Unfortunately
[00:07:38] Jason: you can buy the second product from anybody on Amazon.
[00:07:40] Michael: Exactly. Yeah, so there’s a very good reason to have a place that you can sell yourself.
[00:07:45] If you can get that to work, that’s a whole different set of economics. The ethical bribe, I think, is underused by Amazon sellers. It’s a good reason to have. A website that you can capture emails on. Even if you don’t do any selling on it. I think this sort of hybrid where you have say a site that ranks well on Google for SEO, which is not free traffic, because you have to pay for the writers upfront.
[00:08:04] If you all spend a lot of time on it yourself, but. Gives you traffic again and again, and email capture and then getting people to buy on Amazon is something that I see the savvier people doing more and more of. And I think that’s a really good way of getting some of the best of both worlds.
[00:08:19] And then finally, a trip wire sale. That is a reason to have your own DTC site. Cause then you can control the funnel that people enter. The only way I can think of that, you would do it on Amazon is if you sell, you were mentioning remote controller batteries, but the concept is. Printer cartridges.
[00:08:32] So you sell a printer, an inkjet printer for 40 bucks, and then you sell them replacement cartoons that will do a whole 200 pages for the next five years. It’s a great thing to be on the selling side of, or slash terrible thing to be buying, I think. But that’s a. That’s a great example of where you could have a trip wassail sale on Amazon and it would work.
[00:08:51] Yeah. That’s
[00:08:51] Jason: the old classic original idea before the internet age was the razors and blades, razorblades and blades model, give away the razor and sell the blades. And that type of idea was. Analog version of this idea
[00:09:06] Michael: from the old way. And the dollar shave club is still a valuable commodity and Juliet’s not doing badly.
[00:09:11] I think racism is still there. There’s still works even though it’s the oldest thing in the world, I guess Moffitt was an investor. So you’re right. Raises even better example. You’re right. I was just thinking of index because I always find, I used to get through a lot of those until I realized I bought myself a laser printer and that most of the shock of everyone who sells inkjets printers.
[00:09:30] Yeah.
[00:09:31] Jason: I was just going to say, the difficulty with that model is you just have to be really ethical and honest because people do not appreciate the apple phone that, goes obsolete in two years. Version of reality for no apparent reason. If you sold the razor and blades model and those razors lasted for, for eternity as sharp as ever.
[00:09:56] You wouldn’t have that opportunity. There’s a reason why guys are willing to say, I need a new razorblade because there’s pain involved in shaving when you don’t have a new razor blade. And so there’s an inherent, I need something new here and you can’t fake that you can’t create a product system that doesn’t really with intense.
[00:10:18] Support that idea or customers would just be like, you guys stink, this is dumb. Get, I’m going to find a provider that actually gives me the whole product in totality because you’re a gimmicky, product seller. And so you just want to walk that line carefully and think through, is there justification for that type of trip wire or a step one, step two, a product approach,
[00:10:39] Michael: Yeah, that makes a lot of sense.
[00:10:40] So I know that’s a sort of challenge this and the external slash market challenge of marketing market perception. What about the internal challenges? I know in your book, you say that you need to be pretty aware of some financial numbers. If you’re going to make penetration pricing work without going broke.
[00:10:54] So what are the things that we got to look out for that?
[00:10:57] Jason: Yeah. Three things stand out. The first thing you’ve gotta be clear on is what your cost of customer acquisition is so to acquire the customer now, most Amazon sellers. Contemplate that as a number, they just say, I’m not successful on Amazon.
[00:11:10] Yes or no. And they know that they’ve got whatever it is, the 15% fee structure on Amazon plus whatever adds up to whatever amount your, the current fees are 15% or whatever it is. But that number, that, that crucial number is the cost to acquire a customer. People who sell on their Shopify site direct to consumer have immediate math to work.
[00:11:33] To figure out how much can I spend in advertising or, other strategies to acquire a customer. And so that customer acquisition cost CAC is what it’s referred to commonly is the first number you need to think through. Second number you needed to think through is just obviously what your unit economics are.
[00:11:52] What does it cost you to deliver the goods? If you’ve got a product that. 12 times, 15 times markup and those do exist, there, there are contexts in which I, because we work with clients that have that reality, that there are opportunities like that. Then, you’ve got an, a huge opportunity with pricing discretion.
[00:12:11] If you’re trying to sell something for Keystone pricing where you bought it for $5 and trying to sell it for two. You’re in a very hard position in this conversation. But anyway, so you’ve got to know that, unit economics number, and then the third thing that you really need to have a handle on what you might call the general and administrative costs of your business.
[00:12:28] What is the load of, expense dollars that you need are, and then, and you can make that a per unit number. So for example, in simple math if your overhead costs for your business, R a hundred thousand dollars and you sell a hundred thousand units in a year, then your overhead load or your contribution to, to administration would be a dollar per unit.
[00:12:55] So you want to think through that because the backend of your business has to be paid. And that’s why obviously that multiple, that, that mark up on your cost, it goes as vital. The bigger it is, the more you’ve got to play with to build a business. And so those three numbers, I think, are key to think through, to figure out, what can you do in regard to being a low price leader?
[00:13:15] You certainly can step into a niche where people are just greedy and people have huge margin, and you’re willing to be. Lower margin, higher volume. And if you’re in an industry like that, you can take the low price leader position and do it well, generally speaking, there’s a low price leader in every market and every niche.
[00:13:38] And if you’re not, it, it’s hard to beat that person unless you beat them on the merits of your supply chain and your business efficiency, because all things being equal over time, you won’t just say I’ll live off less margin than that. You have to build a business that successfully runs itself, living off less margin than they do.
[00:13:59] And that’s hard work. And you can’t just say I’m just going to spend less on toner, cartridge and eating out and that kind of thing. And maybe you can for the short term, but you’ve got to think through is my business sourcing the product and making it cheaper than these other companies, and I think that’s vital.
[00:14:15] Michael: A story in, I think it’s in, in the star principle about Filofax. Now this is fascinating because Filofax created a market, which was, called a Filofax on whatever you call it generically, a bit like who varies is the word we call a vacuum cleaner in the UK.
[00:14:29] Cause it created the market and they were also the leader in the market as is often one of the best ways, the classic kind of Richard cosh suggestion or, strategy. But the thing it’s died as a company until it died, but it became very mediocre. And the reason was they’d done two things on the customer end that becomes premium pricing to the point where they were just stave expensive for what they were.
[00:14:49] It was leather with a lot of sort of diaries and organizational systems on paper. For 150 bucks or something was just overpriced. One of the reasons was they had incredible selection and they’d allowed their backend, their overheads that general administered to cost. You mentioned two to balloon their overheads.
[00:15:04] So Richard cos came back in and with somebody else, actually, they took it over and they would use their overheads and they would use. The unnecessary amounts of varieties because we wouldn’t need it in calf scandal, leather purple or something. And they, in the same market as themselves, they became the sort of mid price, so lower costs.
[00:15:24] And as a result, it became again what he would call to start business. So there’s one business that was a star business overpriced itself, and then became a sole business again and took back a leadership of the market that it had created. There’s a fascinating, because. It’s encapsulates both premium pricing and of the dangers of premium pricing and then how to become the person that takes the money off by saying there’s a position below the premium.
[00:15:46] Jason: Yeah. I think the takeaway here is all of us are operating in this. I love this phrase it’s called. I heard it once and it’s stuck in my mind, the real world of competitive marketing. That’s what we’re operating. We’re all dealing in the real world of competitive marketing. And that means people are going to Zig and zag around you.
[00:16:04] And underneath you, above you, next to you in terms of their pricing, their positioning. If you’re the high price leader, they’ll make fun of that and be the low price leader. If you’re the low price leader, they’ll come in and try to be the high price leader. So it’s all a cat and mouse game against your competitors.
[00:16:20] And if you’re playing against a really savvy company, That really has a lot of tools in their tool belt and have stopped through this very well. You can be in a very hard position. Fortunately, in many niches online, we are competing. It’s people who haven’t given a second thought. To their pricing.
[00:16:38] They’re just throwing it out there with average run of the mill standard neutral pricing and we can be more creative than them, but there are tricks. And to think through, or I guess you could say complications to think through that you have to solve on both the premium pricing and on the low price.
[00:16:55] A great comment. Just came in from somebody listening live with us and that’s good Lord. I don’t want to be the low price leader. It cheapens my product. And so this is an interesting comment that I think speaks to the situation, which is the trick with being a low price leader is not devaluing your brand.
[00:17:19] Now, can you think of any low price leaders who haven’t devalued their brand in my mind, one immediately come to mind and that’s Ikea. And the other one that immediately comes to my mind is target. And then I don’t know how it is in the UK, but in target. Target is like just the incredibly much loved brand for the younger female demographic.
[00:17:42] Hey, just love to go to. They find high quality stuff for affordable prices and it hasn’t cheapen their brand. But that’s the thing to sort through. If you do become the low price leader, how do you brand yourself in an interesting way so that it doesn’t, de-value the the offering and have people think, oh, that’s just junk or it’s lesser or inferior than the other.
[00:18:07] Michael: Absolutely. Ikea is also very beloved in the UK. I can’t think of the equivalent of target. Although Aldi is becoming quite beloved amongst the younger, he wants good value. My, my wife loves a bargain to the point that EQT Handmaid’s has said. That sounds like the response of somebody who in their heart of hearts wants to be a premium pricing person considering the possibility of penetration or low pricing, which is fine in which case they premium.
[00:18:31] But what I would say is. That sounds like you’re starting from a point of premium is the good thing. And then cheaper means bad brand. Whereas of course, the good cheap brands as in low cost, have a very strong loyalty and brand just for value rather than. Extremely high quality. So Asda in the UK is a fairly well-liked supermarket.
[00:18:52] I think that has a good reputation. Aldi is really starting to take market share off them because it has a reputation for very good value. And I’d say the quality of their food is very good value. So yeah, it’s a different kind of brand reason why people are loyal to your brand. I guess it comes down to values as the primary driver or maybe some other qualities that you have that you can provide.
[00:19:11] Jason: I like to use the phrase and appeal to value. And Target’s making an appeal to value. Walmart’s making an appeal to value. Ikea’s making an appeal to value those customers who walk into an Ikea, for example, cause I think that has one of the stronger brands or of the three, but or target they’re walking into the store itself saying I love this brand because it’s a great business offering me a low value.
[00:19:40] A low priced item. That’s high value. So they’re in the mind of the consumer, they’re playing with this idea of brand loyalty and respecting and valuing the brand because it’s offering them an appeal to value. That’s something to think through. That’s the power of a strong brand and you have to have that to play that game or else, you do become just a an inferior.
[00:20:01] Competitor, which is not the position you want to be in. Yeah,
[00:20:04] Michael: absolutely. Just final thought on that. An example is that to the point of being a beloved low-price leader, but the, also the that’s the kind of consumer side of it. If you build a business that can live off that, then that’s the only way to keep it sustainable.
[00:20:18] So that can lead to a lot of complexity on the backend to produce something that consumers perceive as very simple. So Ford, for example, Henry Ford, when he created the Ford motor car, did a lot of work with the Nadim steel. Which were involved in a metal alloys, new complex, very modern, never done before manufacturing processes.
[00:20:34] Why? Because it would weigh less and it would ultimately be cheaper per unit. Thus, his unit economics were lower and he could mass produce it at a point where suddenly it became an explosive growth in the buying of cars, rather than just being as a very slow growth, because it was premium priced.
[00:20:49] But the point being that he engineered the entire process. So be profitable at low unit economics, as you said, but I just want to hammer that home because an awful lot of people I see falling into the trap. Thinking about the one side of premium pricing, the perception in the marketplace, but not looking at the numbers.
[00:21:06] At least they look at them, but only after about a year. And they’re very depressed at that point.
[00:21:10] Jason: Speaking of vehicles, the most interesting pricer in the world right now in my view is the Tesla and Elon Musk’s strategy for product introduction and building his brand. And he did a very simple strategy.
[00:21:24] He just had a pyramid and at the top of the pyramid was his original. Product, which is a Lotus of spree that he converted into an electric vehicle. Those he sold for something like $225,000. Don’t quote me, but in general, like it was super expensive and he sold very few of them. This is like a, relatively small number.
[00:21:45] Then his second offering he’s sold for I think one 20 or something like that. Or 180 180 9. And that was the model S I heard somebody the other day was selling their model S and the person I was talking to also had a Tesla and they said, oh yeah, that’s one of the model S’s that was like premium 180 grand.
[00:22:05] You still pay 120 for those. And it was like a seven year old car. But that was the brand initiation and an introduction to people as an ultra premium. For a reason. And then, but Elon Musk’s triangle he’s he announced what he was doing a long time ago. This the third leg and the triangle is a high production lower price vehicle.
[00:22:30] And he’s going down that pyramid construct with higher volumes, every new vehicle with lower prices and the brand itself has become. Hi, aspiration, high quality, cool environmental friendly car, but the prices are getting less expensive every time he rolls a new one out while maintaining this perception of high quality brands.
[00:22:58] So anyway, so those are the things that he’s played with that are masterfully done. And I think we could learn a lot from those ideas.
[00:23:05] Michael: Yeah, I love it. This great, , sophisticated and yet simple and Telegraph, but it still works. That’s a fantastic example to follow isn’t it. If all of us could find a way of doing that in our markets, we would have a really powerful thing going well, look, there’s clearly a ton more to look at here than just.
[00:23:21] As you say, bucket and envelope pricing, there’s a lot more sophistication and thought that goes into this, that integrates, it strikes me with your cost structures and your, , marketing’s last year positioning of the product as well. So if people want to learn more about you, your thoughts on this, obviously the book itself I’m presuming pricing power is available on Amazon these days still.
[00:23:39] Jason: Yeah, it’s only 179. And you can pick up your copy on Amazon. It’s a little joke. There is the Kindle edition is $2 and 99 cents, which as you now know, from this conversation is neutral pricing because that’s what all Kindle books are. So yeah, feel free to check it out on on Amazon in Kindle or in in print edition hope to do an audible edition at some point soon.
[00:24:04] I think it’s an evergreen topic that many people can appreciate. If you want to just pick up a copy and read it. We are going to podcast about the other elements or principles in the book, but I think hopefully it’s a great resource.
[00:24:16] Michael: Yeah, Kindle book for 2 99. That’s frightening. So a lot of books sat us at Amazon, saw the opportunity to penetration pricing in the book market and look what that’s done for them.
[00:24:26] So that’s an interesting example to wrap up multiple examples today. That fixed final thing to say is, first of all, thank you for joining us live if you did. And if you want to follow us on the call in app then please do find us there. That’s available on iPhones at the moment only. Podcasts have a we’re available on apple podcasts, Spotify, Google podcasts, and loads of things.
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