Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How DTC Brands Priced Themselves Out of Growth
Transcript
- Lucas: So you remember those direct to consumer mattress brands that were everywhere around 2018? The ones with the funny names and the 'sleep better, pay less' ads? Luna: Oh yeah, they were in every podcast ad break. I think one of them had a jingle I still can't get out of my head. Lucas: Right. Well, a bunch of them are gone now, and the ones that survived are doing something interesting: they're raising prices. And that might be the lesson of the whole DTC boom — the pricing model that made them famous was the thing that killed them. Luna: So the 'disruptive' low prices were actually a trap? How does that work? Lucas: Let's take the mattress example. A typical DTC mattress sold for around a thousand dollars. The cost to make it, ship it, and handle returns might be four hundred. So gross margin is sixty percent. Sounds great, right? But the killer was the cost to get you to buy one — the customer acquisition cost, or CAC, was often three hundred to five hundred dollars because of all those Facebook ads and influencer deals. Luna: So you're spending half your gross profit just to get one customer. That doesn't leave much for overhead. Lucas: Exactly. And the model only worked if the customer bought once and you never had to advertise to them again. But mattresses are a once a decade purchase, so you're constantly feeding the acquisition machine. The math only pencils if you can get repeat purchases, and a mattress isn't a repeat purchase. Luna: I remember reading that one of those companies had a payback period of like eighteen months. That's a long time to wait to get your ad money back. Lucas: Right, and that's if you don't churn. So the ones that survived had to pivot. Some started selling pillows and sheets to get that repeat revenue. Others realized they needed to raise prices to cover the acquisition costs. But raising prices on a product that was marketed as 'better and cheaper' is tricky. Luna: Because you've anchored your whole brand to the idea of undercutting the incumbents. If you suddenly charge more, you lose the reason to exist. Lucas: Precisely. And that's where I want to bring up someone who did it right. Warby Parker. They started with a hundred-dollar glasses model, which was genuinely disruptive for eyewear. But they didn't stay there. They built a brand that could support premium pricing over time — they opened retail stores, invested in customer service, and eventually sold glasses that cost more than the original hundred bucks. Luna: So they shifted from being the cheap alternative to being a brand that offers value — and people pay for that. Lucas: Yeah. And the pricing strategy changed along the way. They didn't just raise prices across the board. They introduced different frames at different price points, they added options like progressive lenses that cost more, and they used the original hundred-dollar frame as an entry point. That's classic price architecture — you have a 'good' option, a 'better' option, and a 'best' option, and most people don't pick the cheapest. Luna: It's the decoy effect. If you show me a hundred-dollar frame and a hundred-forty-dollar frame, I think the hundred-forty is better quality. If you show me a two-hundred-dollar one, suddenly the hundred-forty looks reasonable. Lucas: Exactly. And that's the fundamental difference between a price-led strategy and a value-led strategy. The mattress companies were price-led: 'Our mattress is just as good but costs half.' That's a hard claim to sustain because it invites comparison on price alone. Warby Parker built a value-led strategy: the product, the experience, the social mission — all of it justifies a premium. Luna: But isn't that just for consumer goods? What about software? I feel like a lot of B2B SaaS companies also use the 'cheaper than the incumbent' playbook. Lucas: Oh, it's everywhere. But software has one advantage: the marginal cost of serving another customer is close to zero, so you can sustain a low price for longer if you have a big market. Still, you see the same trap. A lot of SaaS startups price low to get traction, and then they can't raise prices later because their customers are price-sensitive — they chose you because you were cheap. Luna: So what's the alternative? How do you avoid that trap from the beginning? Lucas: The key is to think about your customer's willingness to pay based on the value you create, not your costs. If you can show a customer that you save them ten thousand dollars a year, you can charge two thousand. That's value-based pricing. The problem with the DTC playbook was that they were so focused on the price tag that they forgot to prove the value beyond 'it's cheaper than the other one.' Luna: So if you're starting a company today, you shouldn't just ask 'how much does it cost me to make this and what's the market rate?' You should ask 'what is this worth to my customer?' Lucas: Yes. And that's a hard question to answer, but it's the only one that matters. I remember a story about a consultant who charged a client a hundred thousand dollars for a report that took him a weekend to write. The client was happy because the insight saved them millions. The consultant priced based on value, not hours. Luna: But doesn't that feel arbitrary? How do you know what the customer is willing to pay? Lucas: You test it. You run experiments. You talk to customers. And you're not always going to get it right. But the worst thing you can do is anchor your price to your costs and then get stuck with a margin that can't support your business. Luna: I also think there's a psychological component. If you price too low, people assume the quality is low. I've seen that with a lot of DTC products — they were so cheap that I didn't trust them. Lucas: There's a concept called price-quality inference. When you don't have other information, you use price as a signal of quality. If a mattress is two hundred dollars, you think it's probably cheaply made. If it's fifteen hundred, you assume it's premium. The DTC brands that tried to be the cheapest actually signaled 'we're not as good' — and that's a huge problem when you're selling something you sleep on. Luna: So they were fighting against their own low price. That's almost tragic. Lucas: It is. And it's why so many of them had to raise prices to survive, but they did it at the cost of their original value proposition. The ones that made it are the ones that built a brand that could support a higher price point from the start. Luna: Can you give me an example of a company that did that from day one? One that didn't just compete on price? Lucas: I think of a company like Dollar Shave Club. They actually started with a low price, but they built a brand that was fun and had personality — you weren't just buying a razor, you were joining a club. That's a value intangible. But even they had to evolve. After Unilever acquired them, they raised prices and added more premium products. So even they couldn't sustain the low-price model forever. Luna: So what's the takeaway for a founder listening? You need to think about your pricing strategy from the very beginning, not as an afterthought. Lucas: Right. And one practical exercise is to write down your ideal customer, then ask: what is the most they would pay for this without a second thought? Then ask: what would make them hesitate? That gives you a range. You want to price near the top of that range, but not so high that you scare them away. Luna: And you have to constantly re-evaluate. We're in August 2026, and with inflation, customers are more price-sensitive than they were five years ago. That creates pressure to lower prices, but you have to resist that urge if it undermines your value. Lucas: That's a really good point. In a downturn, the instinct is to discount to keep sales. But if you've built a brand on value, you can hold your price and let the discounters fight over the bottom of the market. Some of the most iconic brands, like Apple, never discount. They hold their price and their margins, and they come out of recessions stronger. Luna: Speaking of value, you know what this conversation is making me appreciate? The fact that this show is free to listen to. I mean, we get to have these conversations because people who find them useful decide to support us. Lucas: It's true. If these discussions have moved your thinking forward in some small way, and you'd like to keep them coming without ads, listener support is what makes that possible. Anyone who wants to help can buy us a coffee at buy me a coffee dot com slash fexingo. Luna: Yeah, no pressure. But it does help us keep the lights on and the mics rolling. Lucas: So back to pricing in this environment. One of the things I've been watching is how some DTC brands that did survive are now raising prices more aggressively. They're using the excuse of inflation to push through increases they probably wanted anyway. And they're doing it by adding premium tiers, not just across the board hikes. Luna: So they're using price segmentation to capture more value from the customers who are willing to pay more, while keeping an entry point for the price-sensitive ones. Lucas: Exactly. That's the mature approach. And it's a big shift from the 'one price to rule them all' DTC model. The ones that are thriving are the ones that learned to think like a classic brand: build a portfolio of offerings, use price to signal quality, and always be testing. Luna: So if I'm a founder, what's one thing I should do this week to avoid the DTC trap? Lucas: Review your contribution margin per customer, not just gross margin. Contribution margin is your gross profit minus the cost to acquire that customer. If that number isn't positive within, say, the first year, you have a problem. And if you're relying on repeat purchases to make it positive, make sure your product actually has a repeat cycle. Luna: That's a concrete takeaway. And it's a good reminder that pricing is not just about the number on the tag — it's about the whole business model. Lucas: Yeah. And it's a lesson that applies way beyond DTC. Any business that prices based on what the market will bear, rather than what the customer values, is leaving money on the table or building a house of cards. The goal is to find that sweet spot where your price reflects the value you create, and you can sustain your business for the long run. Luna: We should do an episode on value-based pricing specifically. I feel like there's a lot more to unpack there. Lucas: We'll add it to the list. For now, next time you see a startup with suspiciously low prices, ask yourself: how are they making money? Because if you can't figure it out, they probably can't either.