One of the most crucial elements to consider when building your online store is how you’ll price your products. This is one of the elements that will make or break your online venture, since mistakes in your pricing strategy can be costly. You don’t want to price your items so high that you scare away customers, but you don’t want to go so low that your profit margin is suffering.
The price of your products will play an important role in how well it sells. You'll need to consider who your target consumer is, how much your competitors are charging and which price will show that your product is the best value. There is usually a distinct trade-off between quality and price; when something is too good to be true, it usually is. So, choosing the right price for your products can not only influence your sales, but it can also affect how you’re perceived as a business online.
How to Price Your Products Appropriately
Say you have a product that is worth $100.00. If you were to sell it for $1.00, it would be a fantastic deal. Unfortunately, some shoppers might think that it was cheap and shop elsewhere because there’s already an established expectation for how much a product like yours should cost. Situations like this one are why you need to price your products appropriately. In order to do that, you'll have to do your homework. Answer these questions before deciding on your pricing strategy:
- Who is your target consumer? What is their age range? How much will they be willing to spend?
- Who is your competition? How much are they charging?
- Is your product a budget item, luxury item, or somewhere in between?
- How is your product, or company, different from the competition? If all things were equal, why would someone buy this product from your store?
A high price tag comes with some assumed add-ons such as world-class customer service, elegance and exclusivity. Your prices need to reflect the type of consumer you will be marketing too. If you charge too much, you risk alienating your audience. But, if you charge too little, you risk gaining the image of a cheap, low-quality company.
Direct & Indirect Costs
Before considering which pricing strategy you want to employ, you also need to stay aware of the direct and indirect costs involved in sourcing your items. It’s hard to price an item accurately without knowing exactly how much it costs you. This amount isn’t just the price you paid for the item itself; you also need to consider packaging costs, shipping costs (both to you and to customers), a portion of your overhead costs, and any professional services you enlisted to get the product ready for sale, such as photographers or content writers.
After you've done some homework, look at your costs:
- How much does your product cost you to make?
- How high of a markup will you have to use in order to turn a profit? This not only includes the price of your product, but your overhead, shipping, credit card fees, and hosting fees.
If you sell a product that costs you $3.75 for $12.00 and sold 300 of those items, you would receive a revenue of $2,475.00.
But, if you were to lower the price and make it more attractive to customers at $8.00 per unit, you would need to sell approximately 600 units in order to get the same revenue as you would at the $12.00 price point. This means you will need to sell twice as many units and:
- Deal with twice as many customers
- Have twice as many outgoing shipments (which DOUBLES your shipping costs)
- Pay double the merchant fees that you would have had on 300 units.
As you can see, by keeping it at $12.00, you are maximizing the sale.
Effective eCommerce Pricing Strategies
Obviously, there’s a long list of factors that go into determining the perfect price for your products. Let’s go through a few of the most common and effective pricing strategies that you can use and combine to determine what works for your online store.
Your “profit margin” is the percentage difference between your selling price and your profit. By using a margin calculation, you can start determining the best way to price your products. To do this, take the basic cost of the product and multiply it by a set percentage that covers your overhead costs and the profit you wish to make.
For example, if you buy your product for $5, your fixed and variable costs run $1 per item and you want to make $1 on every item you sell, you would need to sell your product for at least $7 to make the profit margin you wished. Of course, this does not include any of the more nuanced considerations like what your competitors are charging, but it does give you a starting price point.
There are very few niches of online stores that have absolutely no competitors. You can use the market to help you with your pricing strategy by understanding the industry standard. Start by doing market research and checking out the competition's websites. You can see how much they are selling their comparable products for and, in some cases, see how well their products are selling. Some sites may list how many items have sold while others may just have a number of reviews.
Once you’ve done your research on their pricing, you can decide whether you want to match their prices or try to beat them. Just be sure that you’re keeping in mind all of your costs, direct and indirect, when employing this strategy along with your item’s quality. You may be able to match/price higher if you know your condition is better, or match/go lower if you can source your products at a price that makes it feasible.
Unlike using the market, in cost-plus pricing, you’re looking internally for your prices. You’ll determine your break-even point for how much you need to sell the particular product at a minimum to make your direct and indirect costs back. After you’ve determined that amount, you can then add in your markup for the profit you can make on that item. You can add in a percentage for all of your inventory or mark them up individually. If you find that some prices may seem too high, then you may need to either find ways to reduce your cost or lower the markup on the item. There are many online product price calculators to help you with this task.
When you have a unique product, high customer demand and few competitors, you can put a high price tag on your product. Basically, you can price your product as high as your target consumer would be willing to pay. Branding can play a big part in this strategy, especially once you’ve branded so effectively that customers will simply buy your products because of its brand. This is a strategy commonly used by large companies like Apple, who produce tech products with exclusive operating systems that many people are willing to spend more for in comparison to alternative products from different brands.
Economy pricing is putting a low price on your product to get the maximum amount of sales. Economy pricing is usually utilized when there are many competitors and your target consumer is very price-conscious. If you’re able to source your products for much less than the competition can, and you’re willing to take slightly less profits in exchange for higher sales numbers, then this strategy may work for you.
This strategy involves giving your product a low price when you introduce it to gain market share, only to then raise the price once you get more customers. After you’ve established yourself in the industry of your choice, you can begin to slowly raise your price to increase profits while maintaining the customer base you’ve already gained.
Bundling & Add-On Pricing
Offering bundles often allows you to sell more inventory while giving customers a chance to get the items they want at a lower price. This upsell and cross-sell strategy can help to increase the value of the items for the buyer because they can feel as though they are getting a deal. Often, it’s beneficial to put a high-value piece together with lower value items to balance out the profits you’ll get from the bundle. This strategy can be a good way to introduce people to your products by creating an introduction bundle that has a variety of items from your online store. Some retailers produce trial sizes of their products that they bundle to entice buyers and show off new product line-ups. This can be beneficial if your products come in different scents, colors, or formulations.
This pricing strategy also takes advantage of products that sell well together. For example, the customer can buy one of the products in a collection for a certain price and then buy other complementary products for a small discount with each add-on. Or, you can sell immaterial add-ons (i.e. warranties, services, etc.) that complement one of your products.
When you understand how people think and feel regarding prices and shopping, you can better price your products to optimize for that behavior. One of the most effective examples of this is using nines in your price. Consumers want a good bargain, so employing this small trick can make something seem more affordable. For example, say your most expensive items are several hundred dollars; you can make your $500 diamond ring seem more reasonable by making it $499. This $1 difference may not seem like a lot to you when it comes to the profit margin, but the psychology of consumer behavior makes it look like a better deal. Psychologists have determined that many consumers are more focused on what the first number is compared to how the number ends. 400 sounds much better than 500, even if it’s extremely close to 500. The same is true with prices like $9.99 compared to $10 or $59 compared to $60.
Alternatively, you can use price to signal quality, fairness or a variety of other intangible product features. For example, pricing your product higher than a competitor's product may signal that it is of better quality – even if there’s nothing physical about it that would justify a higher price.
A great way to use pricing to encourage sales is by implementing promotions, discounts, coupons and sales. By taking a few dollars or a percentage off select products, suddenly you’ve made it so that a product that may have been too expensive to purchase may now be within a customer’s budget. There are many types of price discounts, including:
- Quantity Discount: The more a customer purchases, the bigger the discount.
- Seasonal Discount: Lower rates depending on the season, time of day, etc.
- Promotional Discount: This is a short-term discount designed to increase sales.
Just because you choose a certain pricing strategy or price when you first build an online store doesn’t mean that you have to stick with it forever. If your rates aren’t working, you can change them up to make them work for you. You can use a few different pricing strategies in congruence with each other to determine your perfect price. Implementing tests and experimentation to determine how customers respond to different prices can go a long way towards fully scoping out what your market can bear.