How to Make Variable Pricing Work with Email Marketing

The one thing that any consultant will tell you is to start with the notion that profit = revenue - cost, and then go from there. The idea is that profit is the goal and that minimizing cost and/or maximizing revenue is the way to the goal. Typically, a firm must concentrate on one or another at a time to really be effective. What I’ve heard recently, however, with the economy in doubt, is a desperation-type chatter where firms want to concentrate on both at once and be effective at both. Well, the best action that I know that gets close to doing both, is database-based price discrimination.

The term price discrimination seems so ugly. So we’ll refer to it as variable pricing from here on out. Alas, regardless of what we call it, for retailers that do it correctly, there should be no ugliness whatsoever. In fact, variable pricing via the email marketing channel should be a de facto standard for all of those companies that want to maintain margins when they put their products on sale. Emails, after all, are not broadcast widely; they go to each customer individually. Thus, there is little chance of customer backlash and there exists the perfect opportunity to version your marketing with some savvy segmentation.

Let’s run through how this should work for retailers.

The Sale
The sale is the bread and butter of retailers that need to get rid of merchandise and who want to attract quick business. But the question about sales is whether or not each of your customers needs the same discounts to interest them in your products. The answer is: likely not. Thus, your variable pricing is born. Simply find which customers are least likely to respond to deep discounts. Or, in economics terms, find which customers are least price sensitive.

The Database
You can find your least price-sensitive customers in one of two ways. The first, less-complex method is to simply run through your database and find those customers who have never reacted to a sale, with a special focus on those who have had many purchases and never bought a sale item. Simple math dictates that those customers are less likely to jump at an item simply because it’s on sale. However, this approach is a bit incomplete, which leads us to the second, more-complex way of determining your sale buyers. After all, the first method leaves out customers who haven’t yet made enough purchases to determine whether or not they are interested in sales. A retailer might have many customers that have only purchased once. So how do we determine if these customers - without a single sale purchase - are more or less likely to respond to sales? The answer is a predictive model that finds the deeper patterns in your database and can score newer customers according to those patterns. This second, more-complex approach is a scalpel-like way of determining your sale buyers.

The Emails
Once you have your segmented lists of customers who will and won’t respond to sales, there is the chore of making distinct emails for these groups. For the former group - those who respond to sales - you send them the email that you expected to send. That is, you send them the email with the discount that you expected to offer to the whole of your customer base. Then, for the second email, you send an advertisement with a smaller discount than your base discount. Perhaps 10% less of a markdown. The depth of the discount shouldn’t attract these customers anyways, so giving them a slighter discount really doesn’t matter. But for those of these customers that do buy, you will be preserving the 10% margin that you might otherwise have given away.

Next time, I’ll finish this discussion about variable pricing in email marketing by giving some sample math for this and discuss testing and the common hang-ups that retailers face in effecting variable pricing.

Tags: Email Marketing, price discrimination, variable pricing

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This entry was posted on Tuesday, December 30th, 2008 at 2:09 am and is filed under Email Marketing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.