Variable Pricing-Based Email Marketing: 25% Less Customers Can Make you 22% More Profit

I talked last time about how variable pricing is a great way to maintain your margins on sale items and I gave three general steps on how to perform variable pricing with email marketing. The gist is that each of your customers has a different value for your products and the key is to figure out how to get them each to pay closer to what they are actually willing to pay. The main takeaway is that you should give different sale discounts to different segments of your customers based on their behavior patterns - and the patterns of other customers like them - concerning discounted items. Today, I’ll take a look at the main arguments that companies have when it concerns variable pricing.

The Hang-ups are many but we’ll look at only the two that I hear about most: systems limitations and the immorality of

SKUs and Web Architecture
Companies first and foremost have issues with the system that they use to manage tracking two skus, or two versions of the same sku, that represent the sale-priced good. They also have problems with the content management system and architecture that underlies their web site; many such systems make it painfully difficult to serve the context-based pages necessary for variable pricing. Well, these are powerful arguments that may not be so easily overcome but there are many ways to work around skus that won’t violate the sku system that is in place. In my mind, this is a headache more than a showstopper and shouldn’t halt going forward with a pricing scheme that could make millions if executed properly.

The second argument concerning dynamic pages on the website is more difficult to brush off and is a legitimate problem. The main comment in that case is that your company should start investing in new architecture now so that it can take advantage of the many dynamic content generation possibilities in the years to come. Coupon codes are also a good way to give a checkout-time discount on specified products without requiring a lot of systems overhead.

There Won’t Be a Solid ROI
No matter what system is used to effect variable pricing, I definitely do not want to hear this argument. In some cases, 8 hours of setting up a dual-price scheme can yield at least a 4x return. Let’s take a look at some sample math.

This example shows what happens when you offer a 20% discount instead of a 30% discount. Accordingly, 25% less people buy. But look at the profit. Buoyed by better contribution and lower overall shipping costs, 25% less transactions actually nets 22% more profit.

Moral
I’m not sure it would be worth it for a company like mine. I hear that as well. Well, I’m sorry to say that I just don’t understand what that means. You mean to tell me that you don’t care about maximizing your profit? If this answer means instead that the firm feels morally compelled to give everyone the same price, I have one word: EBay. EBay and other auction-style web sites have been pricing items like this for a decade. And auctions have been around…well…almost forever. And then there are the airlines where no one passenger pays the same price.

At some level, the worry about morality is just a fear of being discovered flipped on its head. And this is a concern; customers don’t like to think that someone got a better deal than they did. But there are ways to conceal variable pricing in a discrete way. Coupon codes (our by-now favorite kluge), for instance, are a good way to get people to get away from customers discovering which offers you are making to their peers.

That’s it for my two-part soapbox on variable pricing. With all of the information available about customers these days, and with price competition certainly ready to put many a retailer out of business, there is no reason this shouldn’t be on every retailers list of things to institute in their direct marketing plans.

Tags: Email Marketing, price discrimination, sales, variable pricing

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This entry was posted on Monday, January 5th, 2009 at 11:22 pm and is filed under Discounts and Offers, Email Marketing, Personalized Email. 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.