Here’s what I learned this week

I love a good debate.

Currently I’ve been going back and forth with an email agency guy about discounting.

His contention, discounting erodes a brand’s value.

My contention, it doesn’t.

Today I’m going to tell you why 99% of brands will never be able to pull off discount free experiences, especially in today’s environment.

MAP (minimum advertised price) Pricing

Most DTC only brands will not know what this is, but if you’ve ever sold in retail or to other vendors that resell your product on marketplaces you will.

And no, selling on Amazon is not the same as Amazon buying and reselling your product on their website.

So what is MAP. It’s an agreement between the brand and their retailer to advertise the product at the same price across all distribution channels.

This is meant to protect the pricing to provide one retailer from undercutting the other etc.

In reality though Amazon and Best Buy run automated scraping algorithms to see any price changes and automatically adjust their prices then the brand is billed for the difference or the loss in margin for any discount not previously agreed upon by the retailer.

There are three types of offers:

1. Retailer funded

This is where the retailer eats the full discount of your products on their books

2. 50/50 funded

This is where the brand funds half the discount in the form of a credit to the retailer and the retailer funds half the discount. This is super common.

3. 100% brand funded

This is pretty rare, because the brand is already paying for shelf space at the retailer and in most cases has already sold into the retailer at wholesale prices.

In this case the brand would be responsible for funding the discount on the lost profit.

Why do I bring up MAP pricing? Because nearly every single brand that’s sold in retail goes on sale in order to better manage sell through and inventory.

In an ideal world, every brand would make the best products and they would all just keep selling out because they are so good.

That works when you have broad brand awareness and high demand.

That doesn’t work if you’re a small company or anyone less than hundreds of millions of dollars.

Is your brand bigger than Nike? Patagonia?

Oh it’s not? Then you don’t have the right to ever say that sales and discounts erode a brand’s reputation.

In fact, in the USA we actually have something called “Premium Outlets”, seriously, look at the list of brands that are OK with associating their names with the concept of “Outlet Shopping” - https://www.premiumoutlets.com/outlet/san-francisco/luxury

So back to MAP pricing here, the whole reason it exists is to ensure alignment on offers.

Let me tell you a little story about how we pissed off retailers so badly that we were almost kicked out.

When you’re sold in retail, you cannot run a sale on your website without letting them know. Their sales teams are subscribed to your newsletter to monitor for email only sales as well and not under their company emails. (Yes, we had a segment that excluded known retailer emails)

So here’s what happens when you do run a sale without telling your retailers, you get a phone call, ridiculously quick.

Then the retailer tells you that they are going to match your offer and they are going to expect you to fund it 100%.

Or they tell you that they need a separate sale in the future that you’ll fund.

True story.

Do this multiple times and the retailer will kick you out of their store, relegate you to online only, or ship back all your product at your cost.

Retailers will run their own deals though too, they’ll tell you about them so you can tell all your channels so there’s no surprises.

Most of the time this goes fairly smoothly. Sometimes it doesn’t.

You become therapist to multiple sales people all fighting with each other and accusing one another.

Apple stores were the easiest to work with, they never price matched or put your stuff on sale. Because well, it’s Apple.

Pretty much all brands go on sale

I just showed you two of the largest brands in the world with “Sales” sections on their website.

This is usually where people start.

It’s also the same when it comes to actually shopping in a store, we’re hardwired to look for a deal.

In the early days of Amazon and online, people shopped online to avoid paying tax on items.

I realize that most people reading this email may not remember those days.

The truth is there’s a psychological need to feel like one is getting a good deal.

The best way to do this is to show savings while shopping.

Honey, Capital One, Rakuten, and others have all built businesses around the ability to find coupon codes from around the internet and auto apply them to carts.

When you can buy anything online, you can comparison shop across hundreds of stores all at the same time, price is always going to be a factor.

There is no badge of honor to say you paid more for something.

If you’re always on sale people will view your brand as being of less quality

True Classic is always on sale. In fact, I would be hard pressed to find a DTC website today that doesn’t have a sale going on.

The price is wrong on pretty much every website.

Consumers know this, Temu knows this, Shein knows this.

And they are dominating the market.

You know who else knows this, Walmart, Target, and others.

DTC brands cater to niches with high priced goods.

Here’s my post from last week:

The truth is if you're a DTC brand, by default you're niche.

If you're not niche and targeting a larger TAM, you're always on sale, and playing the volume game.

Something people have been leaving out too, the price of DTC specific goods has crept up a lot more than makes sense for most goods.

Tee shirts are a great example of this, everything is a bundle and everything is a bulk order deal. A single t-shirt doesn't cost $30.

Yes there are some people that will pay that, but that's a small TAM.

Not to mention one that is 60/40 Cotton/Polyester.

Is a [insert dtc brand here] tee shirt worth 5x the amount of a Next Level T-shirt?

Doubtful.

I'm doing research right now and it turns out the TAM for products vs mainstays in the market comes down to less than 10% of the available audience with most DTC pricing.

That means that paid ads are never going to be super effective for DTC at the current price points.

We've been blaming Facebook Algorithms, when we've really just started to sell overpriced goods to smaller TAMs as a result of the need to keep raising prices with cheaper options flooding the market.

Rather than marketing to a potential market of 100% of even 50% we're actually marketing to 10% and it's really expensive to market to 10% of a potential market.

The only way to break through this is to advertise at high prices on single units, do huge price breaks on volume, and constantly pepper your email list with deals for commoditized goods.

Then it becomes something of an intro offer to start, then bundles that are close to that intro offer price so you change the perception that everyone is getting a deal while maintaining your brand from the outside.

In today's market, until you have sufficient market penetration, this is likely the only play until you get to $50m in revenue at which point you should start looking into retail, because we're also finding that upwards of 30% of consumers still find new brands in stores.

You know what stores are crushing in retail though? Discount stores.

All the signs are there if you know where to look and what to pay attention too.

I wrote this because were running a test currently to understand that effectiveness of Facebook’s pixel in targeting people.

It’s about 20-25% more effective than just broad targeting without pixel data.

But we also ran this to better understand the TAM relevant to price points and price sensitivity in an industry.

People overestimate their TAM (total addressable market).

Let’s do men’s underwear as an example:

My market is all guys - wrong.

My market is all guys that wear underwear - wrong.

My market is all guys that wear boxer brief underwear - getting closer.

My market is all guys that wear boxer brief underwear that are willing to spend $30+ per pair - ok now we have something to work with.

So now we survey the market to find out what percentage of people are willing to pay more than $30 per pair of underwear.

Shit. That market just shrank a lot.

Ok so now we have an issue where the cost of the good is arguably too high, but people tend to purchase when they feel like they are getting a deal.

We’ve also run tests where the sale or discount was the exact same as our normal available offers and it crushes. With literally no additional discount.

So DTC is really all about niches. high priced goods that hopefully come with a quality that doesn’t make sense for most mass produced brands to replicate.

With most brands the bigger they get the more small adjustments are typically made related to the quality of the goods to save money.

So DTC becomes ultra premium.

OK so we also see this happen a lot.

Comparing a brand to a brand of a higher quality to justify high prices.

Unfortunately, you’re always going to be compared to something people are already familiar with which is going to come from a large brand.

How to leverage discounting properly

I’ve talked about this before but it’s all math and distribution.

If you can get more products into hands, you get more word of mouth, you get more repeat business.

In the above example we narrowed down that audiences and consumers are very price sensitive, how do you balance the need for profit and sales to better compete in a market that is increasingly price conscious?

My thoughts on this are pretty simple.

Intro offer to bring people into a brand.

Tiered discounts to encourage repeat shopping experiences.

Artificially inflated prices that allow for a regular cadence of sales to strategically sell through based on inventory.

This keeps the website and the prices premium while also rewarding those on your email list the ability to purchase at a reduced price.

This is why we focus primarily on making sure that people that get on that list are purchasers.

This is the future of ecommerce in my opinion.

Yes there’s always going to be people that will pay full price, but they are a small part of your TAM, discounting allows you to expand the TAM essentially overnight, to more people and then it just becomes math.

I do think that this model will reward those that are vertically integrated though or who partner with factories directly and make quick changes on the fly and speed up the time from idea to production.

With quick time to production and sell through with multiple variants, you’ll over time be able to not only test more but increase prices when demand outstrips product availability.

FTC is coming after dynamic pricing

While we’re on the topic, the FTC is looking into dynamic pricing models that allow for two people’s experiences to have different pricing structures.

Although this has been around for a while, there’s been a rise in dynamic pricing questions around discriminatory practices.

Two people doing the exact same behavior should probably see the same price and the same offers, but that isn’t always the case.

The Takeaway

I don’t see a future for most brands that don’t have a well thought out and structured discounting strategy.

Because of rising costs to do business, brands are actually outpricing their market which is leading to a shrinking Total Addressable Market.

Have a great week!

-Jon

Catch up on past posts: https://ecomwithjon.beehiiv.com/

You can learn from me: jonivanco.com