ChromaDex this week significantly revised the Tru Niagen pricing structure for online sales. The changes were mostly met with negative reviews among the retail investors, but I will cast a dissenting vote and argue that the changes were smart, and good news for CDXC investors.
We'll look at the new and old structures, evaluate the pros and the cons, and then look at how the pricing works from a competitive standpoint.
Prior Pricing
ChromaDex has two primary channels for online sales: TruNiagen.com and amazon.com.
The basic pricing paradigm is that there is a base price for one bottle, with discounts available for multi-bottle purchases and/or for subscription (recurring) purchases.
At TruNiagen.com, the single-bottle, one-time purchase was $50/bottle, with discounts accruing rapidly to a target of $30/bottle for a multi-bottle subscription.
At Amazon, however, the single-bottle, one-time purchase was $40/bottle, with discounts less rapidly achieving roughly same target -- $32/bottle.
This structure used amazon to introduce people to the product, but then gave them a small incentive to later migrate to TruNiagen.com.
By which I mean a VERY small incentive. The financial incentive to migrate from amazon was usually negative, and never large, which, I assumed meant that ChromaDex preferred to rely on amazon's order fulfillment, distribution, and customer service capabilities when possible. That makes all kinds of sense when you are just getting started on fulfillment, because Amazon is really good at this, and their fees are affordable. You can't easily beat them at what they do best.
Encouraging sales through Amazon serves customers in a variety of ways. For example, if the customers have Amazon's Prime credit card, they get an automatic 5% discount. If the customers have Prime, then they get free 2-day shipping. If they have set up Amazon Smile, then 0.5% goes to charity. They also get a permanent record of their purchase, hassle-free returns, a known distributor, convenience, etc. And ALL of these benefits are available to Niagen customers, but not to Elysium customers, because Elysium does not sell through Amazon.
The disadvantages of running sales through Amazon are that ChromaDex has to pay ALL of Amazon's fees, even if they only want the fulfillment advantage. Also, Amazon owns the customer relationship and keeps most of the customer data. Finally, Niagen's product sales ranking is exposed on Amazon's site for retail investors like me to annoyingly speculate about and for competitors to examine.
If ChromaDex were able to fulfill and distribute at a competitive cost, then ideally they would want to still use amazon for customer acquisition, but then migrate those sales to TruNiagen.com, as quickly as possible.
That is what I think the new pricing structure does.
New Pricing
Starting this week on Amazon:
The single-bottle price is $47.50; two bottles are $45 each; three bottles are $40 each; and the the best you can do on amazon is $37.50/bottle, which is the same for six or twelve bottles.
There are two additional discounts available on amazon. Subscribe-and-Save is turned back on, so in addition to the multi-bottle discount you can get a 5% subscription discount. In addition, there are some coupon discounts for first-time buyers.
That means Amazon is the preferred channel for new customer acquisition, which makes sense because nobody will beat Amazon's marketing reach and conversion rates.
But repeat customers have a strong financial incentive to migrate to TruNiagen.com, which looks like this:
Competitive Considerations
Elysium does not seem to have changed its pricing, and is certainly doing its part to maintain a premium price. The sweet spot for Tru Niagen seems to be about $10 less per bottle than Basis, no doubt on the grounds that Basis has an additional ingredient (pterostilbene) and Basis is positioned as the super-premium brand.
At least that's what it looks like from ChromaDex's behavior, because the end result of the new pricing is that single-bottle at $50 is $10 less than Basis's single-bottle price of $60, and the best discounted price on Niagen of $30/bottle is $10 less than Basis's best discounted price of $40/bottle.
The aberration was that for a while you could get a single bottle on amazon for $40, which undercut TruNiagen.com significantly, and Basis very significantly.
That aberration is now mostly gone, depending on (1) How ChromaDex plays the online coupons, (2) Whether the retail price of a single bottle sneaks back up to $49.99, and (3) Whether amazon customers make much use of the subscribe-and-save button.
But, But, But -- The Price Is Too High!
The consensus among the retail investors seems to be that the price of Niagen is already too high, and that these changes on amazon only make it worse. The implicit argument is that (1) customer demand for Niagen is elastic, and the high price is hurting growth, and (2) Using Amazon as a platform for price discrimination makes sense. We'll look at both these arguments.
Elastic Demand
Every Pricing professor in MBA school teaches that problem with price discounting is that the whole amount of the price cut comes RIGHT out of the profit margin. All the production, marketing, and overhead costs remain the same, but top-line revenue drops. So sustaining a premium price is the best road to profitability if you can make it work.
And cutting price is the fastest way to trash your profits. For example, if the profit on a $30 bottle is $10, and we start selling $25 bottles, the price dropped by 17%, but the profits dropped by 50%. So demand has to be pretty darn elastic to make up the difference.
That doesn't mean that a higher price is the right strategy for Niagen, but it does mean that you want to do a lot of math before you start using price to drive demand.
I am sure there is some elasticity in demand. I know people who absolutely will not spend $30-$50 per bottle for a vitamin. On the other hand, there's probably $100M worth of NR sales already from people who will.
I think that my friends who won't pay $1/day for Niagen won't do so because they view the benefit as speculative, unproven, or inapplicable to them (e.g., they are young). I do NOT think that anyone I know would be put off by $1/day if they truly believed that Niagen would save them from suffering a significant health condition, or save them, even temporarily, from some of the aesthetic downsides of aging.
I suspect that ChromaDex's view is that many of the people who sincerely do not believe they can afford Niagen nonetheless are able to buy Starbucks a couple times a week and endure all kinds of other trivial non-essential expenses that add up to more than $1/day, but that the benefit from the cup of coffee is understood as tangible and immediate, whereas the benefit from the Niagen just isn't as clear.
So it's not REALLY that they don't have the money, but that ChromaDex has not convinced them of the value. And convincing them of the value requires marketing, and marketing requires profit.
So from ChromaDex's standpoint, I think, the problem is marketing, not price. A hard problem for sure, but not one that can be solved effectively by dropping price.
Price Discrimination
The best way to solve price elasticity problems, anyway, is through price discrimination. For the people who are able to pay $50 per bottle, sell them $50 bottles. And for the people who are stuck at $30, sell them $30 bottles.
Price discrimination is tough to achieve in online sales, because every web browser gets to see the same price. But it's not impossible. Subscription pricing, multi-bottle discounts, and online coupons all make it possible for people to pay a little less if they value their money more than their time and are willing to navigate the maze.
Or you can sell the smallest efficacious dose for a lower price, understanding that those who can afford more will buy more -- maybe 2x-4x more.
ChromaDex can also use offline coupons and discount codes to reach potential customers whose demographics or organizational affiliations suggest that a lower price will be necessary to make sales, or at least to make the first sale.
But there is no reason to think that offering a lower price on Amazon will efficiently discriminate based on willingness to pay. That's just nonsense. So even if you think that the retail prices are too high, you STILL want the prices on amazon to roughly correspond to the prices on TruNiagen.com, and to drop lower than TruNiagen.com only to the extent that ChromaDex receives actual comparative benefits from sales on Amazon's platform.
In other words, those who object to the new pricing on Amazon are REALLY complaining that price parity was achieved by raising Amazon instead of by lowering TruNiagen.com, or instead of by lowering them BOTH to some new entry level, with the idea that price might go up later once more people adopt the product.
It's not that easy to raise the price later, though. People notice and they react badly.
The better path, I think, is to convince customers that Niagen is worth $1/day. That will take longer, but in the long run it will be worth more.
So head on over to TruNiagen.com. This is as good as it's gonna get, at least for a while. Which, for investors, is probably a good thing!
