This is a guest post by Michelle Deery, a team member of Heroic Search Tulsa. She specializes in writing about eCommerce and is passionate about producing actionable content that provides value to its readers. All opinions expressed in this piece are those of the author.
When you are starting your eCommerce business, one of the foremost concerns will be determining the prices at which to sell your goods.
As a business owner, pricing products can be an exciting endeavor and with the correct pricing strategy in place, it will also be financially rewarding.
However, putting a value on the products you intend to sell is going to involve a significant amount of research, and a bit of trial and error, before financial gains are realized.Therefore, it is vital that you take the proper steps when pricing the products you are planning to sell.
In this article, we discuss 5 simple strategies that will help ensure that you are setting the right prices for your e-commerce goods.
Perhaps the easiest way to determine a price for your e-commerce goods is by checking the price at which competitors are selling the product.
Once you get an idea of the going rate for a product in the marketplace, then you will have a basis for pricing your product. However, it is important to keep in mind that simply aligning your price with that of the competition is not going to guarantee sales or ensure that your company will turn a profit.
One company who has implemented the competitive pricing model is the popular online marketplace, Amazon. During the holiday season, Amazon slashed prices on more than 80 million products to stay competitive with businesses like Wal-Mart and Best Buy.
By making these pricing changes, Amazon will better position itself to gain a larger share of the market as the company continues to grow.
Of course, every company buys products from suppliers at different quantities and this has a drastic effect on the total cost of the product. If Company A is ordering 100,000 units of a product per month, while Company B is only buying 1,000 units, then chances are the cost per unit is substantially lower for Company A, and thus, they can price the product at a lower cost to the public and still maintain a sizable profit margin.
In addition, many companies will offer lower than average prices on items, even though they are limiting their potential for profit, just so that they can gain customers, with the hopes that the customer will continue to make purchases from them in the future on goods that offer a greater margin for profit.
Regardless of whether the competitive pricing model is right for your eCommerce business, it is still wise to check competitors prices to get an idea of where your prices will need to be in order to have adequate sales.
The general concept behind cost-plus pricing is to calculate the costs of materials and labor for a particular product, and then based on those numbers, determine a profit margin that you would like to achieve.
This margin is also known as a markup percentage. Cost-plus pricing is one of the most basic pricing concepts, but it is very useful in ensuring that your profits remain at adequate levels.
For instance, if your eCommerce store sells running shoes, and those shoes are purchased on the wholesale market at a cost of $50 per pair, with an additional labor cost of $10, then you will be spending $60 on every pair of shoes that your business purchases.
From there, you can establish a markup amount, depending on the profit margin that is desired. In this case, if your eCommerce store were to sell shoes while aiming for a 30% margin, then the net return would be $18 per pair.
While there are other external factors that will influence the costs, such as shipping fees and tariffs, the basic idea is that you can adjust the price as needed to reach your profit goals.
This flexibility can be a major advantage if product sales are slow, as the margin can easily be decreased in order to entice more buyers. In addition, it is worth noting that increases in price can be justified by pointing to a rise in costs from the supplier.
Target Return Pricing
The primary goal behind target return pricing is to establish a price based on the returns that are expected on the investment. This expected return relies on the number of products that are forecasted to be sold. Unlike cost-plus pricing, where the return is calculated based on the cost of each product, target return pricing incorporates the total inventory of that product.
One of the advantages to using a target return system is the ease in which profits can be calculated for expected sales. For example, if your eCommerce business expects to sell a specific quantity of a single product from a wholesaler, say 2000 pairs of shoes, with a total investment of $200,000, this amount can then be multiplied by the desired return and initial investment to determine the number of units that need to be sold in order to meet your desired profit level.
In the aforementioned scenario, the total return pricing equation would look like this: Unit Cost ($40) + (Desired Return x $200,000) / (2000). Therefore, if the desired return is 20% then you will need to sell shoes at $60 per pair to reach profitability. A disadvantage of this pricing model is that it does not take into account the prices at which competitors are selling the same product.
This requires that you decide on a variety of different pricing levels so that you can easily adjust prices to stay competitive, while at the same time, allowing you to have an estimate of the number of sales needed for equilibrium.
An additional drawback of using this model is the fact that it can be difficult to estimate the number of sales that will occur, and this is especially true in the world of e-commerce, where there are often multiple alternatives for customers to purchase the same product.
Of all the pricing methods, value-based pricing has the least rigid formula for determining the costs of your e-commerce goods.
Instead of relying on equations to figure out specific price points, value-based pricing relies heavily on understanding the market and the needs of the customer. In its most basic form, value-based pricing involves setting the cost of items to match the interest level of buyers, while at the same time preventing them from considering competitively priced items.
This is done by playing to the emotions of the consumer and estimating the value of which you believe the product is worth based on these sentiments, regardless of the cost per unit or the anticipated profit margin.
In this case, the value-pricing model relies on the concept of supply and demand, while factoring in other variables, such as the popularity and appeal of the product. This particular model works well with brands that are well-established within the industry and have formed a cult-like following around their products.
There are many examples of this in the real world, and one of the foremost would be Apple computers. While there is no doubt that Apple products are sought after because they are dependable and high-performing, there are additional reasons that consumers will spend more money on an iMac than that of a competitor, and that is because of the emotional ties that they have with the brand.
Lead-Generation Pricing Model
An effective way to grow your customer base and increase sales is by implementing a lead generation model.
With the lead generation model, the basic idea is to obtain contact information from prospective buyers with the intention of enticing them to seek more information about your products.
This tactic is especially useful for e-commerce businesses that offer services that are individually tailored to the needs of each customer, and therefore the prices are determined by an array of qualifying factors.
For instance, if your eCommerce business sells wood flooring for residential homes, then there are many aspects that are going to affect the total cost to the consumer, such as the type of wood that will be used and the size of the area to be floored.
Once an interested customer has sent an inquiry to your business, you will be able to discuss the various pricing options that are available for their situation.
One of the most effective ways of generating leads and gaining customers in this situation is by implementing a login portal where potential customers can enter their personal information to receive a pricing assessment.
Upon receiving this information it will be much easier to generate a sale and determine a profit margin. It is worth noting that this strategy is far more effective when providing service oriented products, rather than standardized products that are designed to be the same for every customer.
Final Thoughts | How to set eCommerce prices
When you are getting started in the eCommerce industry, there is no doubt that there will be obstacles to overcome and lessons learned, and this includes developing strategies for pricing the goods you intend to sell.
However, one must not fret, as there are a variety of measures that can be implemented to ensure that your business maximizes profit, while at the same time increasing the customer base.
If you are looking for a structured means of pricing your products, consider the cost-plus pricing model, which is based on determining the desired profit margin after all inherent costs have been assumed.
Another tactic that might suffice is using a target return style system, where you will start by predicting the total revenue of the entire batch of products, then figuring out how many units must be sold to reach equilibrium.
Once your product gains a following, you may want to try the value-pricing model, which plays off of the consumer’s dedication to your specific line of goods, rather than seeking out lower-priced alternatives.
In addition, it is recommended to investigate the prices of similar products offered by competitors, to see if your business can beat the prices and, in turn, draw customers away by providing more value for their dollar.
Lastly, if your business relies on lead generation for pricing, you will want to consider implementing a login portal, which will help to gain information on prospective customers, and from there you will be able to discuss pricing options that can be tailored to address their specific needs.
Of course, there is a lot to think about when getting your eCommerce store off the ground, but once you familiarize yourself with these tactics it will not take long to establish satisfactory profit.