DTC 112: What is the right price multiplier?
DTC 112: What is the right price multiplier?
Are you making money on that sale? There is ingredient cost, marketing cost, fulfilment cost and indirect costs. These should be covered in the product price. How can pricing multiplier help?
👋 Hola! Welcome to Out of Singapore. I am Shan and I am building businesses from Singapore. My plans were to scale a second brand by now, however, things have not gone as per plan. Few things didn’t go well -
Lack of funds to scale two new brands. (advertising and people are expensive)
Play on an overseas team and misaligned goals.
My lack of experience building a new skincare brand. (couldn’t leverage the “non-existent connections”)
Nevertheless, now my entire focus is on scaling one brand.
The key to staying afloat is making money on your sales. A business makes money by
Profitable pricing - After each sale, some money is leftover as profits.
Scale volumes - Sell more. If you make SGD 10 profit per unit sale, you sell 10,000 units to make SGD 100K in profits.
A common hack of product pricing is pricing multiplier. The goal of pricing multiplier is cover all the extra costs that come while selling the product. It’s job is to make the product and the business profitable. Hence the multiplier has to be cleverly engineered.
Wait, but what’s the right number? Is it 5 or 9? Or something else.
Today we will discuss
Key factors on which the multiplier depends on?
What is the right multiplier.
The role of value perception and competition
Let’s dig in.
#1 Factors that determine the multiplier
A common guideline is to use 5 as the pricing multiplier. The multiplier is used on the cost of goods. The multiplier covers the selling cost. Selling cost includes marketing investment, distribution cost and personnel cost.
Cost of goods is commonly the cost of ingredients, consumables, packaging, production cost and freight costs. For ex - if you spent 10K to produce 2000 bottles of sunscreen, then the cogs is 5 per unit.
Before applying the multiplier on the cost of goods, I will also add average order fulfilment cost to the cogs. Almost never a fulfilment company makes a shipment at loss. For Singapore, the cost of fulfilling a single order is SGD 5 for a small item with basic packaging. This cost will go higher depending on fragility and size of the product, unique packaging requirements and last mile experience required.
Now that we have clarified cost of goods and fulfilment costs, the price multiplier has to take into account these factors to make profit on product sales.
Cost structure of sale channels
Are you going to sell on marketplaces, on your own website, in your own physical retail stores or on modern trade stores? Each of these channels have their unique costs classified into direct margins (direct commission of each channel), promotions (discount for customers), and marketing (paid to acquire customer).
To arrive at sustainable multiplier, we need to know these 3 numbers -
Direct margin
Promotions
Marketing cost
The intermediaries between the business and the customer?
Are you selling directly to customer online? Or are you selling via retail stores? Do you have a distributor that handles your offline retail sales? Does your distributor have smaller distributors?
DTC (direct to consumer) is a misnomer. In DTC, the intermediary is Facebook, Google, Shopify and logistic companies. They are not cheap (as popularly believed).
Every intermediary needs their pie (or margin from the sale).
Retail chains charge 60-80% of consumer retail price as their margin.
Distributors will charge 70-80% of retail price as their margin.
Facebook will charge 60-200% of your retail price as cost of acquisition.
To arrive at the right multiplier, we need to know all the intermediaries involved in the product sales. This means choosing your sale channel.
How do you market your products?
Marketing has many meanings. I define marketing as anything that puts the product in the eyes and ears of the customers. Once this is done, you can nudge the customers to purchase with offers, gifts or product benefits (the sales pitch).
So, how are you planning to reach the eyes and ears of the customer? It could be these, among many others.
Digital ads via Facebook, Google - Use average CAC (customer acquisition cost)
Social media marketing via creators and influencers - Use average fees of creators
Celebrity marketing - Use average celebrity fees
In-Platform marketing on marketplaces (search, discovery, banners, emails) - Use average cost
In-store marketing in offline retail shops (shelf space, emails, product placement) - This translates into margin per product and some fixed costs
Out of home advertising on billboards, and public transport - Get media kit from top OOH media companies
So, once you selected the sale channel, you will know your initial marketing channel.
Which markets do you plan to sell in?
Are you planning to sell domestically or globally? If domestic, which regions are you targeting. For Singapore this is simple, since the country is small. However for larger countries like Malaysia, Indonesia or India, you need to find the target region.
For selling globally, which countries are you looking at? Like DTC, global is a misnomer. Global will be finding the target countries and right local markets there. For example, if we expand into UK, we will target London first before expanding into other areas of UK.
Each market can have its own unique pricing multiplier. Why so? Because you can select a different sale channel and intermediary for each market. Copy pasting GTM of one market into another will cost you time and money. Hence, selecting which channels will work best in specific markets is important.
#2 What is the right multiplier?
Let me demonstrate this with a few examples. For simplicity, we will use these 3 factors.
Discount to customer (customer promotions)
Discount to channel (channel margin)
Marketing cost (channel marketing)
Case 1: Multiplier is 4 and customer discount is 30%
Your only channel options are marketplace and online resellers
Case 2: Multiplier is 7 and customer discount is 30%
Now, you can possibly sell in all the channels. However, offline distributor is not profitable enough (5% profit margin is low).
Note that your channel options will change if your customer promotion value changes or you can sell at lower margin from your channels. Here is the calculator for you to play with the numbers.
I have recently realised that multiplier of 9 is safest bet. Here is the demonstration for it. It gives you flexibility to increase your promotions and leverage new sale channels if one of them doesn’t work.
There you go. Now you find a product, get its cost and arrive at customer retail price.
It’s not so simple though.
#3 Role of value and competition in multiplier
Once you have identified your multiplier and expected retail price, you need to look at two things.
What is the value of your product?
What price is your competition selling it at?
Value of product has two parts to it. First, the actual value it provides to the customer and second is the perceived value. Actual value could be time saved or money saved. Perceived value is in the eyes of the person and society. Imagine a Hermes bag - perceived value is very high. Here you need to determine how you wish the brand and product to be perceived. Both have their pros and cons (and cost implications).
Competition often determines what price you can sell at. The only way to price higher than competition is if you are bringing a innovation or improvement that the customer really cares about. If your price based on the multiplier is higher than competition, you need to reduce all the costs (or identify an incorrect cost).
That’s it for today. Hope this helps you price your products right. I have done several pricing mistakes over the past 8 years. If you do, please find and fix it.
Thank you reading today. You are a gem!
Health has been my focus for past 3 years. It translates into
Better food choice (less spice, less sugar and high protein)
Regular work out (I aim to 5-6 days of active days)
Better sleep (longer restful hours)
I am doing decently in all these segments. However, I need progress. Food is okay. Work outs including running has to improve a lot. I would like to include group sport into the schedule. Sleep will follow if I am tired.
Jisoo time
Come, kneel before me! 😂
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