Pricing your products as an ecommerce store owner can be one of the hardest jobs you’ll ever do in that business. Although price is not always a deal breaker for consumers as they are often not just looking to buy the cheapest product, it is always an important part of the equation.
In essence, you need to find the right balance between making profit per unit and the optimal number of purchases. There are many strategies to price your products and help you do the above, but the best way is to mix at least 2 strategies.
Pricing can really make or break your ecommerce business, so it’s important to spend enough time here to get it right. Also, don’t forget that depending on your overall strategy, you can add other tactics to the mix to increase each customer’s earnings and lifetime value.
Before we dive into the strategies, let’s get our facts straight first. You need to know the following before developing a pricing strategy or formula:
1) The margins of your products.
This is relatively easy to do. Calculate the cost of each unit of a specific SKU (transit to your warehouse and any other fees included). Then try different prices and just follow this formula:
(Price – Cost) / Price
This simple formula will give you your margins for each product. Under no circumstances should you price that product that results in a negative number.
2) Advertising cost.
Are you going to advertise your products? Most likely it will and most likely online.
You need to add the cost of advertising to promote that specific product to your costs or just divide it across all of your SKUs.
For example, if you spend $ 3000 every month on Google AdWords to promote your products and your ecommerce store, you need to divide it among all of your products equally.
With those 2 basics out of the way, let’s move on to some simple pricing strategies for old and new ecommerce businesses. Remember that you can use any of them or ideally a combination of them. What works best for you will depend on your location and market, don’t blindly copy others.
Pricing Strategy 1: Cost-Based Pricing
This is one of the most popular and simplistic pricing strategies for both e-commerce stores and physical retail stores.
The way it works is to simply take the cost of a unit as identified in step 1 (transportation and other variable costs included) and then simply add your desired margin on top of that or a simple fixed amount of money that you consider optimal. The total amount will be the final price of the product.
The 2 challenges with this approach are that you must calculate the exact cost of each unit without forgetting any cost and that you must know that cost to always stay on top during promotions etc.
If an e-commerce company has really defined its business operations aspect, it can easily use this method with minimal effort.
The amount of overhead you will add is up to you, but generally employee salaries are left out of the equation.
The second tricky part is how much profit to add. One part can be made from experience and another part (or all) by tracking the prices of competitors who sell the same or similar products.
Too high or too low a price can cripple your sales. Doing a check on your competitors by hand first and then regularly with software can help you stay on top of them.
Pricing Strategy 2: Market-Oriented Pricing
Expanding on the last section of the above strategy, this strategy is also called a competition-based strategy and takes into account what your competitors are doing and what conditions the market is in.
This is a good strategy for commoditized products and if you can compete on price. This is usually combined with another pricing strategy such as price number 1, based on costs. In essence, it helps you identify when to lower your prices to get more sales, but without compromising your profitability in the first place.
Not only that, but when your products are too low, you can also increase that price, remain the cheapest supplier, and squeeze that additional profit.
Pricing Strategy 3: Consumer-Oriented Pricing
This is also called value-based pricing and is generally for non-commodity products. In these cases, the security is normally sold and the price has to be reasonable.
For example, a newer product that might not have direct competitors can follow that pricing strategy, while highlighting its benefits over older or competing products.
Focusing solely on revenue and number of sales can be disastrous if you don’t have a strong and profitable pricing strategy. By using pricing tools, you can always stay competitive, and coupled with the right pricing strategy, you can keep your sales and profits at the right level.