Evaluating a product as an ecommerce store owner can be one of the hardest jobs you will ever do in that business. Although prices are not always foldable for consumers because they simply do not want to buy the cheapest product, it is always an important part of the equation.
Basically, you need to determine the right amount of earnings per unit and the optimal number of purchases. There are many strategies that you can appreciate for your products that help you do the above, but the best way is to combine at least two strategies.
Prices can really make or break your ecommerce business, so it’s important to spend enough time here to get it right. Also, remember that depending on your overall strategy, you can add other tactics to the mix to maximize profitability for each customer and their lifetime value.
Before we get into the strategies, let’s first clarify our facts. Before developing a pricing strategy or formula you need to know the following:
1) The margins of your products.
This is relatively easy to do. You calculate the cost per unit of a particular SKU (transit to your warehouse and any other fees included). Then you try different quotes and simply follow this formula:
(Price – Price) / Price
This simple formula will give you margins for each product. Under no circumstances should you place a price on this product that results in a negative number.
2) Advertising costs.
Will you advertise your products? Chances are you are most likely online too.
You should either add the cost of your advertising to promote that particular product or simply split it between all your SKUs.
For example, if you spend $ 3K a month on Google AdWords to promote your products and ecommerce store, you should split that across all your products equally.
If these two basics don’t get in the way, let’s move on to some simple pricing strategies for old and new ecommerce companies. 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, do not blindly copy others.
Pricing strategy 1: Cost-based pricing
This is one of the most popular and simplified pricing strategies for both ecommerce and retail brick and mortar stores.
The way it works is by simply taking the unit cost as determined in step 1 (including transportation and other variable costs) and then either adding the desired margin over it or simply by fixing a fixed amount of money that you feel is optimal. The total amount will be the final price of the product.
The 2 challenges with this approach are that you need to understand the exact cost of each unit, without forgetting any costs, and that you need to know that the costs are to stay above it during promotion, etc.
If the ecommerce business really downplayed the business aspect, it will be easy to implement this method with minimal effort.
How much extra money you add is up to you, but usually employee salaries are left out of the equation.
The other tricky part is how much profit to add. Part of this can be made from experience and another part (or whole part) from tracking the prices of competitors who sell the same or similar products.
Too high or too low prices can reduce your sales. If you check your competitors first hand and then regularly using software, you can help you stay above that.
Pricing Strategy 2: Market oriented pricing
Extending from the last section of the previous strategy, this strategy is also called a competition-based strategy that influences what your competitors are doing and in what condition it is.
This is a good strategy for commodity on goods and if you can compete in price. Usually this is paired with another pricing strategy like # 1, cost based pricing. Basically, it helps you decide when to lower your prices to get more sales, but without compromising your # 1 profitability.
Not only that, but when your products are too low, you can also increase that price, remain the cheapest supplier, and squeeze that extra profit.
Pricing Strategy 3: Consumer oriented pricing
This is also referred to as value-based pricing and usually refers to non-commercial products. In these cases, the value is usually sold and the price is only reasonable.
For example, a novelty that may not have direct competitors may follow this pricing strategy while highlighting its advantages over older or other competing products.
Focusing only on revenue and sales numbers could prove disastrous if you do not have a solid and profitable pricing strategy. Using pricing tools, you can always be competitive and paired with the right pricing strategy, and you can keep sales and profits up and to the right!