It’s not easy to set up your eCommerce product Pricing. If you overprice your things, people will leave your business and go to one of your competitors. On the other hand, if you price your goods too low, you may not be able to sustain your firm. Not to mention the possibility that customers will believe your product is of poor quality, which is not ideal!
It’s all about striking the perfect balance between the two outcomes when it comes to pricing your products, but that’s easier said than done.
Fortunately for you, there are a few things you can do to try to discover your ideal price, and we’ll go through them all in this blog post.
Are you eager to learn more about eCommerce Product Pricing? Great. Let’s get started with how to win at your eCommerce product Pricing – part 1!
Understanding Your Target Market for your eCommerce product pricing
You must examine how much clients are willing to spend before you set your eCommerce product Pricing. This entails conducting market research and product keyword research. By the end, you should have a better idea of how much your buyers are prepared to pay for your goods.
So, first and foremost, go to your competitors’ online businesses and use their e-commerce product Pricing as a starting point. You can either match or over/undercut these costs now that you have this knowledge.
When analyzing competitors, you should strive to create accurate like-for-like comparisons between their price and yours. This entails comparing your net costs to theirs, rather than merely the price of the products on their website. This information can be discovered (or at least estimated) by looking through published data and public sources such as industry whitepapers, corporation records, financial reports, and so on.
You can also do the following to gather more market research:
- Send out informal surveys to your audience via email by providing hypothetical product descriptions and asking what price range they would be willing to pay for them.
- Keep up to date with industry news regarding trends in consumer shopping habits, consumer buying preferences, and industry innovations.
- Hire a third-party consulting firm to gather market research data on your behalf.
In addition to all the above, you could also break down your customers into smaller groups and analyze them. Are they cost-conscious? Are they after something of exceptional quality? Does status make a difference to them?
You can use this information to guide your product pricing strategy once you have a better understanding of which category the majority of your customers fall into.
It’s Not Just your eCommerce product pricing That Matters—It’s Your ability to be discoverable.
You read that correctly.
Sales are not driven solely by the price of your products. Instead, your ability to drive traffic and market yourself as a brand is what drives sales. This entails developing and implementing a sales strategy. So, if you don’t already have one, you should get one.
Invest time in learning how to effectively market yourself online. Split test your strategies and keep an eye on what works best with your target audience. This is just as important as correctly pricing your products!
Pick the Best Ecommerce Product Pricing Technique for Your Business
There are numerous eCommerce product Pricing techniques available, so be sure to investigate them all and select the best one for your company. However, we must emphasize that there is no one-size-fits-all formula that applies to all products and markets.
Here are a few pricing models for products that you could use.
THE COST-PLUS E-COMMERCE PRODUCT PRICING MODEL
The cost-plus eCommerce product Pricing model necessitates that you add a percentage markup to your breakeven costs (which are your direct product material costs, labor costs, overhead costs for the business, etc.).
This percentage varies depending on the products you sell, your niche, and your business model. As a result, you’ll need to rely on your experience as well as industry norms to determine an appropriate markup for your products.
However, you should be aware that the cost-plus pricing model has limitations. Its main disadvantage is that it assumes you will sell all of your units. As a result, if you do not sell all of your merchandise, your profit will be lower than you calculated.
THE VALUE-BASED E-COMMERCE PRODUCT PRICING MODEL
This model functions similarly, but your profit margin is determined by the value customers place on your products. So, in order to use this eCommerce product Pricing model, you must first understand your market’s perception of the value of your products.
Consumers judge the worth of a product based on a variety of factors such as availability, exclusivity, quality, performance, innovativeness, added value to their lives, and so on. These are just a few examples; consider what your target audience values and how your products measure up to their expectations.
So, while a cost-plus product pricing model may suggest that you price your products at a 20% profit margin if you know that your target market would pay a price that earns you a 35% profit margin because of the value it provides, you could price your products value-based rather than cost-plus.
To begin, if you choose this product pricing model, you should compare your products to those of your competitors to see what consumers are willing to pay for what is already on the market.
Why Bother Calculating your eCommerce Breakeven Analysis?
The main reason for conducting a breakeven analysis is to determine how long it will take to turn a profit. This calculation can also be used to calculate profit and loss over different time periods. As a result, you’ll have a better understanding of how changing your product price affects your profit.
Furthermore, breakeven analysis is an excellent figure to show investors. You can easily use and display this data to demonstrate how profitable your company is (or will be).
How Do I Calculate My eCommerce Breakeven Point?
There’s a simple formula you can use to find out your breakeven point. It is:
Profit = P(X) – VC(X) – TFC
- P is your selling price (what you charge your customers)
- X is the number of units you’ve sold
- VC stands for variable costs
- TFC stands for total fixed cost
Whereas, to calculate your Contribution Margin (the incremental profit generated when you sell an additional unit beyond the breakeven point), use the following formula::
Contribution Margin = P(X) – VC(X)
Accurately Working Out Your eCommerce store Costs
By accurately calculating your costs, we mean taking into account all of the expenses you incur to get your product to market. This includes the following:
- Direct Payments: This is a type of variable cost. It is the money you have invested in developing your product (s).
- Variable costs: These expenses will rise as you sell more products. Materials, packaging, marketing, and so on.
- Fixed costs: are overheads that remain constant regardless of how many sales you make. Domain Name, utilities, hosting, and so on.
Let’s take a closer look at these three different costs:
When you order your products from a wholesaler or a dropshipping company, calculating the cost of each unit is much easier. It’s simply the cost of each product from your supplier!
However, if you want to make your own products, you’ll need to do more research. For example, how much does it cost to buy all of the materials needed to make one unit? This is in addition to the time you spend developing your product.
Your time is priceless. Period. Always keep this in mind when calculating your direct payments.
Are you unsure how to calculate the worth of your time? First, decide how much you want to earn per hour, then divide that figure by the number of products you can produce per hour.
As previously stated, fixed costs are expenses that remain constant regardless of what or how much you sell. It’s tempting to push this figure to the side and try to forget about it but don’t.
You must set a goal of covering these expenses through sales, which, as previously stated, requires conducting a breakeven analysis.
Your fixed costs do not include inventory. However, it does cover all of your one-time start-up costs as well as your monthly fixed expenses. As an example:
- Your company’s registration
- Your web domain name
- Your logos and images (if you’re hiring a graphic designer)
- Your copywriting and content creation (again, if you outsource these tasks)
- Your website theme (if you choose a premium theme)
- Costs of advertising and selling
- Any website apps and plugins that are paid for
- Any business software that you use to help manage and automate your operations
- Any costs associated with borrowing money, such as business loans, should be considered.
- Your paycheck
- Capital for future growth
Other examples of fixed costs exist, but you get the idea.
My best advice is to make a spreadsheet that includes all of your monthly expenses. This ensures that you account for all of your fixed costs.
Again, as previously stated, your variable costs include:
- The product cost
- Your inventory
- Your delivery
- Delivery from your supplier to you
If you are not drop-shipping your products, you will need to have your suppliers or wholesalers ship them to you or a third-party fulfillment company that you have hired.
In either case, you must consider the cost of having your inventory shipped to the correct location. You must contact your supplier directly to determine your shipping cost per unit.
Other variable costs to be aware of are:
Import Duty Tax: If you want to reach a global audience, you’ll need to be aware of the import duty tax that comes with shipping internationally. Don’t worry if you’re not sure what that is! You can use a duty calculator to help you figure out these numbers.
Credit Card Fees: Depending on the payment gateway you choose, you may be charged credit card fees. These are typically around 3 – 3.6 percent plus $0.30, but as previously stated, this is dependent on your credit card processor, so check their rates and factor those figures into your variable costs.
Don’t Forget to Consider Other Factors that will affect your e-commerce product pricing
Don’t make the mistake of overlooking other factors that influence your profit margin. As an example:
- VAT (Value Added Tax)
- Differences in consumer trends and disposable income exist across regions.
Whether you need available cash flow in case some of your customers pay late, or in increments (if applicable to your type of business), all of the above factors must be considered to ensure healthy cash flow
Be Prepared to Make a Change
Remember that your eCommerce product Pricing isn’t set in stone; you can change your mind and try something new. Just because you launch a product at a certain price doesn’t mean you have to keep it at that price indefinitely. Your prices, like the majority of other aspects of your business, will evolve.
So, be open to changing your product prices; there are a number of factors that could affect the price of your merchandise. For example, changes in:
- Your expenditures
- Demand from customers
- Your competitors’ success
This entails keeping a close eye on your expenses and thoroughly understanding your customers’ purchasing habits. This greatly aids you in staying on top of your pricing game.
Decide on a Profit Margin for your e-commerce product pricing
Remember those variable costs we mentioned earlier? Go figure out that figure. This total is critical for incorporating profit into your eCommerce product Pricing.
There are two factors to consider when determining how much profit margin you want to make:
It is not only your variable costs that must be covered. You must also make enough sales to cover your fixed expenses.
You want to make sure that your product price still reflects the going market rate after you’ve added your profit margin to your expenses.
These two factors will help you decide on the percentage of profit you want to make.
Product Profit Margin = (Selling Price – Product Cost) /Selling Price
It is entirely up to you how much profit you make on each unit sold. However, keep in mind that the price of your products is what keeps your business afloat. It goes without saying that growing and scaling your business will be difficult if you are losing money or barely breaking even.
When to Raise or Lower Your eCommerce product pricing
As previously stated, you must constantly test new prices, promotions, and product bundles. This is the only way to determine the best price for your products. However, whenever you change your pricing, make sure to track and record your sales. This is the only way to determine which price yields the highest conversion rate.
If you raise your prices too far, you’ll know you’ve gone too far when your customers stop buying from you, and they’ll stop buying from you fast.
Keep an eye on the competition as well. If you notice that they’ve begun charging more for similar products to yours, there’s a good chance that your increased price will be in line with industry norms.
Whatever you do, don’t raise your product prices overnight. This may turn off potential customers and keep them from returning to your store. Instead of implementing a sudden increase, create a gradual plan. This should take a year or two years. This method is far less likely to turn off customers.
Alternatively, if you believe you have overpriced your merchandise for your ideal demographic, you may need to lower your prices. If this has happened to you, try running a discounted promotion to see if it affects your conversion rates. Alternatively, consider providing a free giveaway to customers in order to get them to try your product.
Ready to Start Pricing Your Products?
LISTEN TO YOUR CLIENTS
By listening to your customers, we mean soliciting and analyzing customer feedback on your pricing. This not only gives you a better understanding of the current state of your pricing but also helps you build a stronger relationship with your existing customers. After all, everyone wants to believe that their voice is being heard.
BUDGETING IS ESSENTIAL.
Budget your business expenses a few months ahead of time so that you can tailor your pricing plan to your specific needs. Examine your sales data to get an idea of how many products you’ll sell in a given time frame.
This will also give you a good idea of what is already profitable. Spend some time analyzing the profitability of your current products. This way, you’ll know what you should do more of (sourcing similar products and marketing them the same way). More importantly, you can stop selling items that aren’t converting and are costing you money.
If your prices are too high and customers aren’t biting, you may need to consider sourcing a similar product for a lower price elsewhere (without compromising on quality). This may require some trial and error, but it may be worthwhile in the end.
I hope that after reading this article, you have a better understanding of how to price your products. The main takeaway from this article is to price your products carefully in order to build a long-term business. It really is that simple! After you’ve mastered that, make sure to keep monitoring, analyzing, and tweaking your product pricing strategy to ensure you’ve fully optimized the cost of your products.