E-Commerce Guide: How to Price Your Products
E-Commerce Seller Financing • February 3, 2020
When setting up a completely new e-commerce store or adding new products to your product line, it’s important to know how to price your products properly. If you set a price that’s too high, you may not be able to make sales.
However, if you set the price to be too low, then you may not be making enough to break even and profit from your e-commerce business efforts. You also risk having your potential buyers believe that your products are of low quality, thus preventing them from buying from you.
Therefore, you need to find the perfect midpoint between these two extremes, which can be easier said than done.
Below are a few tips to help you price your products in a way that helps you make sales as well as profits.
How to Price Your Products
1. Research the Market
One of the first things you should do is find out how much your potential customers are willing to pay and how much your competitors charge. Then you can decide to match them or offer a different price.
Price matching can be risky as potential buyers may choose an established vendor with positive customer reviews over one that’s new. You can consider offering a slightly lower price to beat your competition. Keep in mind that your product price should cover its costs as well as any additional costs that you may have.
However, you can also change more I what you offer is higher quality or is otherwise a better find than your competitor’s product. Make sure to clearly state these differentiators to help buyers make a choice.
2. Calculate Your Costs and Break-Even Point
List all costs that are needed to develop the product as well as any additional costs, such as packaging. Factor in any fixed business expenses, for instance, rent for office and warehouse premises, utilities, wages to your employees, and similar.
Add all of these costs together and divide them by the volume of products. This is going to be your break-even point. Your product price should be higher than that for you to make profits.
3. Choose Your Pricing Model
There are several pricing models which you can choose from based on your business goals:
- Cost-plus-pricing model: this model involves adding a markup percentage to your break-even point. This percentage based on your industry, niche, and products. E-commerce store profit margins generally range anywhere between 5-40%. Keep in mind, though, that you must sell all or most of your products to make a profit. If you don’t, your profit margin will be lower. You also risk losing money rather than gaining.
- Value-based product pricing model: this model is based on what value customers attach to products. So, you must thoroughly know the market to determine that. Factors that can influence this proving model are quality, availability, exclusivity, performance, materials, innovation, as well as the value this product brings to the customers’ lives. So, even if you would add 25% markup to your products based on the cost-per-pricing model, you may be able to sell with a 35% or 40% profit margin is that is what your customers are willing to pay for. A great example of this is The Boring Company’s flamethrowers. They were marketed as useless and overpriced, yet all 20,000 flamethrowers sold for $500 simply because Elon Musk’s reputation was making people want to pay such price. Moreover, they are now being resold on eBay for as high as $5,000!
4. Consider Any Other Factors
Think about any other factors which may determine how to price your products. These can be:
- VAT: If your business ships to the EU, you may need to consider a VAT that your customers may need to pay. In certain instances, this can be more than the actual product price, and this can affect the customer’s willingness to purchase from you.
- Different markup percentages for different products: You do not need to have the same margins for all products. You can price some of your products cheaper to bring in more profits with other products, for instance, you can offer cheaper goods and upsell something more expensive with higher margins to your existing customers.
- Payment plans: If you sell larger or pricier products, offering payment plans can help you boost your sales. In this case, the total price of all payments can be slightly higher than the regular price you would offer. Yet, it would provide your buyers with a more convenient way of making smaller payments that will not dramatically affect their monthly budget.
5. Be Ready to Change Your Prices
Depending on the products you offer, you may need to modify your prices over time. This frequently happens with products that get new and updated versions released. For instance, you pay one price for the latest model of iPhone when it first gets released, but a lower one when it’s no longer in high demand.
Make sure to monitor the market and be ready to act when you need to change the price of your products.
Are you trying to determine how to price your products? What is the greatest challenge that you are facing?