How To Price Your Products As Ecommerce Businesses
Pricing your products as an ecommerce store owner can be one of the most difficult jobs you will ever do in that business. Although pricing is not always a deal breaker for consumers, as often they are not simply looking to buy the cheapest product, it’s always an important part of the equation.
In essence, you have to figure out the right balance of profit-making per unit and the optimum number of purchases. There are plenty of strategies to price your products and help you do the above, but the best way is to usually 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 into the mix to increase the profit from each customer and their lifetime value.
Before we dive into the strategies, let’s get our facts straight first. You need to know the following before you develop a pricing strategy or formula:
1) The margins of your products.
This is relatively easy to do. You calculate the cost of each unit of a specific SKU (transit to your warehouse and any other fees included). Then you try different prices and you simply follow this formula:
(Price – Cost) / Price
This simple formula will give you your margins for each product. Under no circumstances should you put a price on that product that results in a negative number.
2) Cost of advertising.
Are you going to advertise your products? Chances are that you will and most probably online.
You should add to your costs the cost of advertising to promote that specific product or simply divide it between all your SKUs.
For example, if you spend $3K each month on Google AdWords to promote your products and your ecommerce store, you should divide that between all your products equally.
With those 2 basics out of the way, let’s move on to some simple pricing strategies for ecommerce businesses old and new. 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 both for ecommerce stores and brick and mortar retail stores.
The way it works is by simply taking the cost of a unit as identified in step 1 (transportation and other variable costs included) and then either simply add the desired margin on top of that or a simple fixed amount of money that you deem optimal. The total amount will be the final price of the product.
The 2 challenges with this approach are that you have to figure out the exact cost of each unit without forgetting any costs out and that you have to know that cost in order to always stay above it during promos etc.
If an ecommerce business has really nailed down its operations aspect of the business they can easily utilize this method with minimal effort.
How much overhead you will add is up to you, but usually, the employees’ salaries are left out of the equation.
The second tricky part is how much profit to add. A part of it can be done from experience and another part (or the whole part) from tracking competitors’ prices that sell the same or similar products.
Pricing too high or too low can cripple your sales. Doing a check of your competitors by hand first and then regularly with a software can help you stay on top of them.
Pricing Strategy 2: Market-oriented Pricing
Expanding from the last section of the previous strategy, this strategy is also called competition-based strategy and it factors in what your competitors are doing and in what condition the market is in.
This is a good strategy for commoditized products and if you can compete on price. Usually, this is paired with another pricing strategy like #1, cost-based pricing. In essence, it helps you identify when to lower your prices in order to get more sales, but without compromising your profitability from #1.
Not only that but when your products are too low, you can also increase that price, remain the cheapest vendor and squeeze that extra profit.
Pricing Strategy 3: Consumer-oriented Pricing
This is also called value-based pricing and it’s usually for non-commoditized products. In these cases, the value is usually sold and the price has just to be reasonable.
For example, a novelty product that might not have direct competitors can follow that pricing strategy, while highlighting its benefits over older or other competing products.