Good Morning Operators!

It’s starting to turn into my second favorite part of the year - The weather in NYC is rising and the Sun is coming out, which means it’s time for touching grass and hitting golf balls. If that isn’t your thing, I hope that the weather getting warmer means you get some time to kick back, relax and enjoy some high quality outside time 🙂 

Before I get into today’s content, I wanted to share a few words to express my gratitude for you all. I got promoted last week at work, and you all played a meaningful role in helping make that happen. I shared a longer post on Twitter that walks through more of the details, but in addition to the insights from the DTC twitter community, having you all read and engage with my content helped a lot to validate the claims I bring back to my team about what matters to brands and operators. I take a lot of pride in being an advocate for this community at work, and it is tremendously meaningful to have that recognized. It is a privilege to get to work with so many brands every day, and it isn’t something I’ll ever take for granted.

Now, on to today’s content:

Part II: Your Pricing Strategy (is probably) wrong

You might recall that in Part 1 of pricing strategy last month (here it is for anyone who missed it), we covered two important tactics 1) “Gift with Purchase” pricing and 2) LTV-Based Pricing. These tactics drive a lot of value for brands because among other secondary effects, they increase the AoVs and LTVs by unlocking more “value” for the consumer at higher spend points so everyone wins. Brands get increased AoVs & LTVs, Consumers get more value from brands!

Some brands take these tactics a step further.

Tactic 3: The Mix & Match Bundle + Subscription

Bundles + Subscriptions bring together two powerful levers into one tactic: Get all of the AoV and margin benefits from a bundled product while simultaneously boosting LTV and repeat purchase rates via a subscription offering. It’s not surprising to see this blended tactic deployed by one of the most successful DTC beauty brands in the game today - Sol de Janeiro.

Let’s take a look at the Brazilian Icons Duo from SDJ:

Why this works:

• It gives the people what they want - Take two of SDJ’s top selling SKUs and put them together, and customers will come. 

• Builds AOV while delivering more “value” to the customer -> Even with a slight discount, the net profit generated from a $78 purchase is likely much better than the profit generated from each of these SKUs individually. 

• The subscription option multiplies the LTV and profit generated from customers that choose to subscribe when they initially purchase. Even with only 30% of customers choosing to subscribe, the impact is pretty significant. I’ve detailed this a bit below but before we get there I want to put on my growth operator hat and think through the strategy of this offer.

What we love about the strategy of this offer:

• “X for the price of 1”: How many additional purchases can I get that customer to make after only paying to acquire them once?

• Building future up-selling opportunities: In this example, not only do you get the recurring subscription revenue but you also introduce up-selling opportunities from the samples they choose to include with this purchase - bonus points if you’re including a loyalty program with this.

Now imagine hypothetically, that they did this with other top selling SKUs? That’s how you create a force-multiplier in your business with your pricing strategy. The unit economics just make too much sense 👇

The Unit Economics of SDJ’s Bundle + Subscription offer:

Note: The figures for COGs, Margin, Paid Media CAC, Repeat Customer & Purchase Rates below are assumed and may not be reflective of SDJ’s actual business metrics. I pulled these numbers out of what I’ve seen across the industry at a high level.

Notice how the Total Profit nearly doubles when 30% of customers sign up for the subscription. This is why putting bundles & subscriptions together can be a force multiplier for the growth of brands in consumable categories (e.g. beverage, beauty, skincare, wellness, etc). This example also assumes a 3 month lifetime, which is pretty conservative for a leading brand in this category. If we wanted to do more math and take this a step further, we could do the same exercise assuming 20% of subscribers stick around for 6 months, 10% for 1 year, and so on and so forth.

So why doesn’t everyone do this? When does it make sense to use this tactic?

Here are some considerations to make:

• Which SKUs have the highest repeat purchase rate?

• What else do customers purchase when they buy our hero SKUs?

• Of our hero SKUs, which ones do we have the most inventory for? Do we have the capacity to align inventory production to subscription purchase cycles?

• What is the typical lifetime for use of these products? Do products purchased together have similar use lifetimes? (i.e. will they need to be replaced at the same time?)

These insights can help uncover which products may make sense to put into subscription - bundles.

Furthermore, taking a step back, when setting prices in general it’s important to consider the following:

• How much flexibility do we have to run promotions at a given price point?

• How much value can we create at different price points?

• How do we balance progressive discounts (e.g. like true classic) against our margin and LTV?

• How might our pricing structure incentivize or disincentivize a customer to come back and purchase from us again?

The answers to these questions should help provide you with a strong foundation for your pricing strategy and the kinds of tactics you employ to help incentivize your customers to transact with you, again and again. May the repeat purchase rates and ad platform conversion rates be ever in your favor 🙂 

That’s all for this week.

Zach