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How To Price Your Products As Ecommerce Businesses
Pricing your products as an online store owner can be one of the hardest things you will ever do in that business. While pricing isn’t always the deciding factor for consumers, as they often don’t just want to buy the cheapest product, it’s always an important part of the equation.
Basically, you need to figure out the right balance between profit per unit and optimal purchase quantity. There are many strategies for pricing your products and helping the above, but the best way is usually to combine at least two strategies.
Pricing can really make or break an 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 return and their lifetime value.
Before we dive into the strategies, let’s get the facts straight. Before you develop a pricing strategy or formula, you need to know the following:
1) Margins on your products.
This is relatively easy to do. You calculate the price for each unit of a given SKU (including shipping to the warehouse and other charges). Then you try different prices and just follow this formula:
(Price – Cost) / Price
This simple formula will give you the margins for each product. Under no circumstances should you set a price for a product that results in a negative number.
2) Advertising costs.
Are you going to promote your products? Chances are you will and most likely online.
You will need to add advertising costs to your expenses to promote that product or simply spread it across all of your SKUs.
For example, if you spend $3,000 a month on Google AdWords to promote your products and your online store, you should split it equally between all of your products.
With those two 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 preferably a combination of them. What works best for you depends on your location and market. Don’t blindly copy others.
Pricing strategy 1: Cost-based pricing
This is one of the most popular and simple pricing strategies for both online and brick-and-mortar stores.
It works by simply taking the unit cost in step 1 (including shipping and other variable costs) and either adding on top of that the desired margin or a simple fixed amount of money that you think is optimal. The total amount is the final price of the product.
The two challenges with this approach are that you need to know the exact price of each unit without forgetting the cost, and that you need to know that price to always stay above it during promotions etc.
If an e-commerce business has really nailed down their area of business, they can easily utilize this method with little effort.
How much overhead you add is up to you, but usually employee wages are left out of the equation.
Another tricky part is how much profit to add. Some of it can be done based on experience, and some (or all) of it can be done by watching the prices of competitors selling the same or similar products.
Pricing too high or too low can cripple your sales. By checking your competitors first manually and then regularly with software, you can stay ahead of them.
Pricing strategy 2: Market-oriented pricing
Expanding on the last part of the previous strategy, this strategy is also called a competition-based strategy and it affects what your competitors are doing and the state of the market.
This is a good strategy for commercial products and if you can compete on price. Usually this is combined with another pricing strategy like #1, cost-based pricing. Basically, it helps you identify when you need to lower your prices to get more sales without compromising your #1 profitability.
Not only are your products too low, but you can also raise the price, stay the lowest seller and squeeze out extra profit.
Pricing strategy 3: Consumer-oriented pricing
This is also called value-based pricing and usually applies to non-commodity items. In these cases, the value is usually sold and the price should only be reasonable.
For example, a novelty product that may not have direct competitors may follow this pricing strategy and emphasize its advantages over older or other competing products.
Focusing solely on revenue and sales volume can prove disastrous if you don’t have a solid and profitable pricing strategy. By using pricing tools you can always stay competitive and with the right pricing strategy you can keep your sales and profits up and at the right level!
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