Drew Marconi is the CEO and Co-Founder of a SaaS company that specializes in price testing called Intelligems. Drew is an experienced leader of operations and finance teams who decided to bring his knowledge into the ecommerce space to help merchants increase their margins through innovative price testing practices. Drew and I talk about price testing, how to fight inflation, common misconceptions about pricing, and much more.
What is Intelligems
Drew Marconi: So, Intelligems, we do profit optimization for e-commerce brands. So we started by helping merchants test their prices, like AB tests. 10 versus 20, versus 30 for a hat. What converts best, what gets the best revenue, most profit. And we realize there's a bunch of other things to do, like testing, shipping rates. Is free shipping worth it? Where should your threshold be?
We realize we can help brands test their discounts and measure uplift and what drives profitability. So we kind of have a suite of tools that help brands go split tests and dynamically adjust all things dollars and cents on their site. Price, shipping, discounts, subscriptions, offers. So it's kind of like conversion rate optimization process where you're running these tests, seeing what works, but all focused around what's driving additional margin and how price plays into that.
Alex Bond: I think that's really cool. I haven't really ever heard that before. And with this price testing, can you walk me through that process that testing process a little bit more specifically?
Drew Marconi: Yeah. Maybe it's helpful to start with how prices are typically set, at least for most of the customers we work with, which is teams that are very analytical and have their own process. But in a lot of cases, I have a mug. It's costing me $8 to make and to ship to the us.
I'm gonna target a particular gross margin for my business call it 75%, that'd be great. So I just multiply that $8 by four to get my 75% margin. All right, great. This needs to cost 32 bucks. Then maybe I check out some competitors. I look at the market and say, oh, well actually our competitors are more at like 30.
Let's like do 29 or 29.99. That feels good. And then they kind of stick the finger in the wind and let it ride. See if that seems to work. Just keeping an eye on like performance day every day and leave it, like I said, some people are more analytical, but like that ultimately is kind of a guess, and that's kind of like the 1960s style of pricing.
It's called cost base, like how much of this cost I need a certain margin's gonna do that. What it misses is like, well, how much does the customer value this mug at? You know, could I charge more? Could I actually drive a ton more volume by driving by pricing it lower? Maybe people are less willing to pay for the mug, but I have a coffee grinder on my store that actually has super high value to the customer.
So they're willing to pay 90% margins on that, and you miss out on that when you're going through this process. So anyway, price testing, we help you go, basically go empirically. Figure out how much your customers are willing to pay for different products in your store. So I may take that mug and I'm going to send a third of my traffic to $28, a third of my traffic to $32 and a third of my traffic to $38, and I'm going to measure, okay, people in each group, how many added the products to the cart, how many purchased.
When they purchased, were they buying multiple? Were they buying just one? And what ultimately was my margin? Like how much take home did I get from each of these groups? And you could see like what's called the price elasticity. In that case of like when I increased that price 10%, did I lose only 2% of demand?
In which case, great, that's making me extra money when I lowered the price 10%. Maybe I can generate 30% more demand, in which case that's making me more more revenue. So we kind of help brands like walk through that process and then maybe you'll do the coffee grinder next to basically find like the sweet spot for prices.
Alex Bond: Absolutely, and I think what's interesting in the older model is you start with how much you want to make and what your competitors are selling it at that equation doesn't even include the customer or the people buying it when it really comes down to it, and the fact that that old hat way of business was done for so long is really quite fascinating. Just for my general curiosity, about how or when did that change essentially? Like why did that change?
Drew Marconi: Yeah. The customer needs to be included now. Cause as customers, we've never had more options to choose from, I can go research mugs for days to pick the best. Probably when the concept of value-based pricing started to be pushed out by the big consulting firms to corporates.
And you know, that like has trickled down. I think you then have the concept of dynamic pricing, which can mean a lot of things, but let's say it is using data in fast iterations to update your prices. So like the travel industry started rolling that out in the eighties, nineties. Like airlines is what we're most familiar with I think the ride sharing industry.
So starting around like 2012, I think is when surge pricing was introduced. Played a huge role in normalizing dynamic pricing. Like I remember surge seeming crazy 10 years ago when that rolled out and now we accept it. It's part of how we pay for hotels. Ticketing system. Started rolling that out in the last couple years.
So it's been a slow progression. It has tended to be concentrated with the largest companies like the Ubers and the Amazons of the world can have a team of 50 data scientists working on this problem. And that's me and my co-founder actually came from a ride sharing background and we built a team of 20 doing pricing.
I think for SMBs, which a lot of the e-commerce and Shopify industry would count themselves as part of that. They can't go afford to hire a data scientist, like they have boxes to ship and like stuff to get out. So part of what we like about what we do is we're trying to take this like superpower that's been reserved at the top and bring those principles down to smaller, smaller companies, smaller brands.
How often should brands change the price of their products
Alex Bond: I wanted to dive into this a little bit, so to make sure I'm following you correctly, drew to my understanding your goal is to find that sweet spot where customers are engaging with the product while you are increasing the ROI for it. Because it typically feels like either sales are booming, but a brand is leaving money on the table or the price is too high and a product isn't moving for a typical brand or business.
Say I'm selling, you know, we'll take your example, coffee mugs or something like that. How often should a brand be changing the price of their products? I is a products price? Something that should be continuously tweaked over time? We're talking about ride sharing and travel costs. I think it's important question to ask.
Drew Marconi: I think that's where we're gonna go. Like, I think it's a matter of when, and not a question of if dynamic pricing comes to e-commerce and people are using data and, and prices are floating, like I think even the concept of a sweet spot, it's a nice thing to think about, but like that sweet spot could change every day.
You have different ads running different audiences. Your competitor introduced to new product, like the market that you're selling into is super dynamic. It's like at least countrywide, if not worldwide, and tons of movement. That said, not everyone's gonna go start changing their prices every 10 minutes right now, and, and you need a lot of data to do that, which is just not always feasible.
You know, you have what traffic you have. I think like at a minimum branch should be evaluating their pricing on a quarterly basis and have like a stock list of questions that you go to. And figure out who needs to be in that conversation. And at least ask yourself the question of like, are these prices working? Do we have enough margin? Do we think we could grow more?
And force yourself to have that conversation. Like I, I've seen companies where they'll let prices sit for two or three years and like that just doesn't work anymore. You know, between inflation and all these cost increases both on like the acquisition and the actual running the business side, like you need to be more reactive in keeping an eye on it.
And so, you know, you don't have to change it quarterly, but at least quarterly ask yourself the question of, do these still make sense? Do we need to test anything? You know, are these prices sustainable or are they holding us back in some way.
Alex Bond: No, that's great. Quarterly makes sense. And you know, frankly, from my personal experience, I feel like once a year, I always get an email from Netflix and Amazon Prime and HBO max, that's we just increased our price by $2. I'm not going anywhere.
So really more, more often than not, prices just go up more than they do kind of wave a little bit. And so that's why I think your work is really important here because it could actually help people a lot to lower their prices.
I also wanted to talk about this combination of price testing and shipping testing that you do, which generally involves gauging if a product's price should be lowered or the shipping cost should be lowered or free.
So how much does that difference between a higher priced product with free shipping and a lower price product with additional shipping affect a customer if the outta the door cost is generally the same.
Drew Marconi: We've run that kind of test a few times where it's like, should this mug be 32 and you pay three bucks for shipping, or should it just cost 35 with free shipping? It varies a lot brand to brand what the answer is. So we've had cases where just lumping it all in and saying free shipping has performed it super well, like big boost to conversion rate.
We have a hypothesis, it's not necessarily like data backed yet, that older customers tend to be more drawn in by free shipping or more frustrated at paying for shipping. So the brands we saw that worked well, like it was catering to like a 50 plus audience, whereas we had a brand that was in the apparel space where lowest price you can offer for that t-shirt was the biggest driver for conversion rate.
Even if I then charge you a few bucks for shipping at checkout. The hypothesis there, you know, younger audience, probably more comparison shopping, like a t-shirt is a t-shirt. There's a lot of options. So like if you can get that low price in the Google feed, that's gonna be helpful. And then separately, this is kind of a hot take.
I don't know how hot this take is anymore. I think most people have come around, but let's go free shipping, like almost never makes sense. Just straight up free shipping. We've tested that many times versus a free shipping threshold like, spend a hundred to get free shipping, spend 50 the totally free shipping has never won on a profit basis yet.
You're gonna sell more items. You're gonna get more orders, but it hurts you in a few ways. A, you're just like losing money on all this shipping. B, your order values are lower. So like I'm maybe spending 18 bucks to ship a box with $20 worth of product in it, and I'm just starting off fairly profitable before I factor in COGS or acquisition. We have never seen pure free shipping when a test versus a threshold or paid shipping. The threshold is just, it's really powerful for getting people to spend more.
Alex Bond: That's fascinating. I think that's really cool. With all these tests that you run, do you give your clients the definitive results of these tests? And then implement your findings? Or is it up to the brand to decide what to do with your findings? Say I was signing up to, you know, Intelligems. What's that process look like?
Drew Marconi: We do our best to give you, you know, clear results pretty easily compare, Hey, here's what happened in group A versus group B versus group C. And you can measure the confidence and then you can click, hey, all right, great. Roll this out. So like the nuts and bolts are automated. It's not always clear what the winner is like, I always tell our customers like, you have to have clear sense of your goals as a business in order to decide which price is best.
Cause you may have a goal of I wanna grow this store on a five year time scale. I'm super confident in my ability to retain customers and bring them back and introduce more customers. Like I just need to break even. And then I want to get as many customers as possible this year. Or you could be venture backed and say, I don't even need to make money on the first order.
I'm just trying to get like, as many customers as possible. Base. Yeah. Versus on the other end it could be like, hey, you know, we're getting ready to sell, or this is a business at it's maturity phase. I just wanna maximize the dollars coming out of it. Like totally maximize profit. Those two people could look at the same test results and see two different answers as the winner.
Like I'll go back to our coffee mug, maybe selling it at 28. Maybe that is making a little bit less total profit. Been selling at 38, but you are doing four x the volume in terms of orders and customers. Yeah, those two personas are gonna say, I don't care. Give me the 38 because it's making me 10% more profit and that's what I care about. Or, hey, I'm confident in my ability to monetize those customers later down the road. Like give me the highest converting one right now. So yes and no is the answer to your question.
Alex Bond: Sure. And do you walk the client through those different options? Or do they have a pretty, you know, set goal in their mind into how they want to implement their solution? Do you give any sort of like almost consultation advice for like, look, if I were you, I would probably pick this one. Or do, or is it very, I don't know, do the brands have a lot more autonomy in their decisions and know what they want?
Drew Marconi: I mean, we always are happy to strategize with our customers. I do think oftentimes that conversation about what are your goals is an enlightening one. Like, I don't think people have often thought about pricing with relation to company-wide goals. So that is typically helpful. And then you know, we atine where we need to, but generally people can, like, you know, the data is really clear in our dashboard.
What happened to conversion, what happened to revenue, what happened to profit? And they can go look at that and decide. You know, what tradeoffs they want to do. Ideally, one group generates more profit, more revenue, more conversion. Like that's a great outcome. No one complains, but oftentimes you're balancing tradeoffs.
How brands can fight inflation
Alex Bond: So I want to talk about inflation. So I can imagine you mentioned it earlier, I can imagine that's a clear factor for this need and desire to change prices efficiently and effectively. So how can brands fight a somewhat insurmountable variable like inflation?
Drew Marconi: Yeah, it's a tough one because it hits everything both on your costs are going up across the board. Labor, freight, delivery. It also is impacting your customers.
You know, maybe they, in an unpredictable way, maybe they are feeling, hey, I gotta spend this money now cause it's gonna be less valuable, but, I think the overall environment has, we're generally led to like iffy consumer confidence, which then determines how much people are willing to spend on things that aren't essential.
It's tricky. Couple things that brands can do. Number one, go back to this like quarterly idea. Keep an eye on your margins. Like do your best to ignore the top line, like on a weekly basis, go look at the entire bridge from your gross sales, but then, how much did I spend on discounts? How much did I spend on returns and allowances?
What did my net revenue end up being? And then how have my costs changed? And I think the tighter a grasp you have on that. And ideally you can be forecasting that, not super far in advance, but like there's a 13 week model as a common method. You'll be able to track like, hey, have my margins eroded to a point where I need to go change this?
And that puts yourself in a position to react really quickly. Second, I think you need to understand what, what margin is possible for your business. Like, are there inflection points where below a certain gross margin on your products, you cease to be sustainable as a business like? You know, I can acquire a customer for this much.
I know their LTV is worth that much over this amount of time. That formula at what gross margin does it work versus what gross margin does it go negative and you're just starting to like lose money on on each incremental customer. That is a super important number to have a handle on, and you kind of need to do this granular work to understand your breakdown and your models get there.
But like, hey, if we're dropping below 55% gross margin, We gotta raise prices. I don't care if it harms growth. Like where are those hard lines? And three, I mean, I'm biased here, but like, go test it out. You know, maybe like your competitors actually raised prices a ton and you can get a big boon by lowering prices if that's possible.
Maybe you can like squeeze some extra revenue from shipping, or you actually don't need to be offering as big a discount. Like look at those factors and then go figure out which. Which items you can test on that that breakdown.
Alex Bond: I'm glad that you mentioned kind of undercutting your competitors, because that's a pretty common business strategy, especially in a time when prices are increasing.
It's important to, I guess, talk about if that's sort of old hat thinking when it comes to e-commerce because there is a boom of competition. There's just such a surplus in today's day and age that I'm curious if that's still a usable strategy.
Drew Marconi: Yeah, so I'll make a distinction between owned brands direct to consumer, where I have my brand of mug and it's special and different than other mugs versus.
Like retail resellers, like, hey, I'm selling Stanley mug that Walmart and Target and several other stores are also selling the same model. In the latter case, comparison shopping is almost purely price driven. Some customers on the list price, some looking at shipping, so there's like undercutting can be powerful there to win some customers, but you're also typically dealing with a pretty complicated set of agreements with those other retailers and the wholesaler.
Maybe you have a minimum advertised price agreement. You have to occasionally get creative of like, are there exclusive bundles I can build? Can I offer, get an edge on shipping? Or some particular kinds of offers that help you seem appealing without breaking your rules or ruining your margins.
Cause you're typically operating on pretty thin margins there on the brand side. Like owned brand, my mug. I'm telling you the story of why I came up with this and the features and what makes it special and unique like that is a big part of the goal of a DTC brand. Like here is why we've created this product.
So you're not necessarily being compared one to one on like, well this one's 32, this one's 33, I'm gonna choose 32. Like hopefully you have some features to justify it or a story behind it, or perks anyway with respect to undercutting, because it's not a one-to-one comparison. You can play around with it a bit.
You can try going just a little bit lower or a lot lower and see if there's particular break points in the pricey elasticity, cuz it's not gonna be just. If you're 1 cent cheaper, someone's gonna buy. A lot of these brands have made their living by like putting out a premium product and charging a premium.
So it's not old hat. Like it's a valid strategy. And we have seen in super competitive markets like sheets price reductions, generating a ton of increased demand. It's not necessarily the winning strategy. Like you could also go premium, earn more that way. And I think when you, when you go down, the thing to keep an eye on is like, are you still getting high quality customers?
Like those cohorts who came in at the lower price, do they have as long LTV? Are they only ever purchasing when they get a discount and they're like promo seekers. So there's just some things to keep an eye on, even if those initial price cut results are really good.
Alex Bond: No, I appreciate you breaking that down for us. So about essentially a couple things. So what are some other things that brands should be doing to help profits this year?
Drew Marconi: Good question. That's a big one. I mean, whole list of things. I'll break it down into like two broad things. Growing AOV. Average order value and improving retention.
Growing AOV, reason that's important is like there's been downward pressure the last couple years. We see that in our data, you know, people spending less per order, but you can increase that order value. You save money on shipping, like it doesn't cost that much more to ship a larger order versus a smaller one.
And you've pulled forward cash. So it's easier to get that first order profitable. And then on a retention pretty clear like, I've already spent the money to acquire this customer, so any extra money they spend with me after that first purchase is gravy. Much easier to make that profitable and, and use that as a solid margin on AOV.
Couple strategies we're seeing, I mean, a play with your prices. That's the most direct translator to AOV. So we're happy to help with that. Two, think about new product launches and like how those are gonna change AOV. Are they gonna replace an existing product or add on? You can really play with your product mix.
Try to get, introduce new products that are complimentary and get people to increase that basket size. Third, think about your merchandising and, and this is also something that we help with a lot, is volume discounts. So how can you use things like bulk deals? Buy five T-shirts, save five bucks tiered offers for your promotional calendar.
So rather than just saying, hey, 15% off everything, 5% on orders under 50, 10% off orders, over 120% off orders, 200 Use tiered discounts to make customers earn. That money back and spend more with you and, and we have a lot of experience building and testing. Those use things like upsells and cross sells, both before the purchase and after the purchase to get customers to buy more.
Lots of little widgets and merchandising things you can do on the store to. Get people to spend more on retention. You know, I am not a retention expert and it is hard. Everyone says it's a priority and it's very difficult to do well. One area that we're excited about there, discounts can, or some forms of offers can be a powerful retention tool.
Hey, we haven't purchased for a while. Here's $10 off your next order. You wanna be cautious about not becoming too discount a brand. And we often see that those discounts are like not measured. They're not well analyzed. What we are helping brands with this year is, hey, let's go help you target those discounts you're using in retention efforts.
Like which customers should you give it to test the results? Let's try a few different offers. What is the sweet spot between uptake and. The revenue you're giving away. And then over time personalize those and help you like segment the customers into who needs what kind of offer so you can start to get smarter about engaging your existing customer audience and giving them like the right offer at the right time.
So that's something that we're really excited about. Have also seen some like cool AI tools out there for analyzing like, who you should focus your retention efforts on subscriptions. If you have a product, do that, like are a great retention tactic that's kind of built in, so that's worth not like checking out as well as some, there's a lot of tools to like ping people when it might be time for a repeat order, particularly with consumables.
This company repeat that, does that, so yeah, a lot of tricks people can try there, but, I think generally getting more analytical on like abandoned carts and win backs and these kind of campaigns that go out to existing customers is our focus.