How Drop Pilot Finds the Right Price for Your Merchandise

Poor pricing practices are insidious — they damage a company’s economics and limit growth potential. Yet, because the most important pricing component (customer value) is inaccessible to even the most seasoned pricing experts, many, if not most, businesses resort to adding a margin to their manufacturing costs, hoping the consumer will be receptive.

In fact, according to a recent survey by Bain and Company, “most CEOs and Owners do not have a formal methodology when it comes to pricing their products and services…. Most companies call pricing a high priority, but 85 percent say they have significant room for improvement in pricing.” See Ron Kermisch and David Burns, “Pricing: A Survey of 1,700 Companies Reveals Common B2B Pricing Mistakes,” Harvard Business Review (June 7, 2018): 5.

                                       Happy Gilmore Is Spot On

Again, the reason businesses repeatedly fail to implement better pricing practices is that learning what the customer is willing to pay is so difficult. Think about it, absent clairvoyance, how can a business get into its customers’ minds and learn what they want to pay? Accordingly, even after decades of trial and error, marketers still debate how to uniformly measure customer value much less apply that information to the price of a new product.

As explained below, Drop Pilot’s technology solves this longstanding problem by flipping the traditional model on its head. In other words, instead of guessing the price that customer will pay, Drop Pilot lets customers tell the retailers directly. The result? A tailored market price, based on quantifiable customer value, for every new good or service.

How Drop Pilot Allows Any Retailer to Quantify Customer Value for their Products.

In a nutshell, our platform operates like this: (1) businesses release a limited run of a new product (not yet available for sale) and set a minimum bid to cover their manufacturing costs; (2) customers submit blind bids demonstrating the price they are willing to pay for this new product; and (3) businesses use the bidding data to determine an appropriate price (and profit margin) before formally releasing the new item and selling it through their primary sales channel. We call this strategy cost-plus market pricing.

The reason that this strategy works is because it provides equally compelling value to both buyers and sellers. Here’s how:

Sellers

Retailers sign with us to sell a limited run of a new or unknown product they are ready to release to the public. Our job is to help them capture the best margins in their primary sales channel by finding the market price, i.e., the price the purchasing public wants to pay. We facilitate this process through our once-a-month 72-hour event called “Drop Day.” During Drop Day, multiple brands release their new products simultaneously but do not list the price of their items. Instead, they let consumers express their perception of the item’s value by placing blind bids.

We pride ourselves on providing our retailers with the highest-quality pricing analytics. Instead of sending out surveys and asking potential customers what they would pay, we base our analytics on pure purchasing intent. To illustrate, when a consumer places a bid on our platform, we place a hold on their payment method for the full amount of their bid. We believe that the price points arising from these bids provide a more accurate representation of the customer’s “willingness to pay” because the customer has taken the step of actually parting with their money and making a purchase (instead of just responding to a survey).

As a result, the sellers walk away with thousands of price points based on bids representing each customer’s “willingness to purchase” the item. Then, the sellers use that information to properly price their new product and sell it through their primary sales channel.

Buyers

At the end of the 72-hour Drop Day period, our technology aggregates all the bidding data to calculate the “Drop Price.” This is the price that all winning bidders will pay for a relevant item. To calculate the Drop Price, we rank the bids from highest to lowest and then use the number of items for sale to determine the ultimate purchase price. For instance, if Nike does a limited run with us, releases 15 pairs of shoes, and 200 people bid, the top 15 highest bidders will get the shoes, but their purchase price will be based on the bid submitted by the 16th highest bidder. That way, the winning bidders are guaranteed to pay less than they bid. To make this work, we release the hold on the buyer’s payment method and issue the winners a partial refund for the difference between their bid and the Drop Price. The other 185 people (who did not place a winning bid) get a full refund.

In short, the Drop Price feature encourages buyers to place bids based on their highest and best estimation of a product’s value because they know they are guaranteed to pay less than they bid or get a full refund.

Also, to help make the entire purchasing experience seamless, sellers are prohibited from adding post-transaction fees or expenses. Instead, we obligate retailers to cover their manufacturing costs, shipping, taxes, and processing fees as part of the minimum bid. This helps consumers buy with incredible confidence because they know their submitted bid will always be their bottom line.

Conclusion

Customer value is widely considered the gold standard for pricing. Yet, until Drop Pilot, discovering that data was virtually impossible. Welcome to the future.