Before you start setting up your eCommerce shop, one thing needs to be at the heart of your store – your product! And two of the most critical considerations when figuring out what to sell online are the price and margin. And quite frankly, businesses - no matter what size or what industry - live and die on trying to balance both aspects. It is, therefore, paramount to you as, an entrepreneur, to know how to price your product and maximize your margin.
What are Price and Margin?
Price is the amount of you ask from your customer for your product or service. However, this definition only represents a small part of the entire story. A product’s price doesn’t come up out of nowhere and is actually determined by different factors.
The easiest way to determine your product’s selling price is that all costs and profits should be covered. Do take note though that a product’s price is not static. It moves along with the other different factors too. For example, fluctuating costs of acquisition would significantly raise or lower the price of your product. This dynamic nature is what makes pricing so challenging – and we’ll discuss more of the intricacies of pricing later.
Margin, on the other hand, is music to every entrepreneur’s ears. While, in a business sense, there are different definitions associated with the term ‘margin,’ let’s talk about ‘Gross Margin’ specifically. Gross Margin is the difference between the product’s price and its cost of acquisition. Technically, it’s the most basic way of determining how much your eCommerce business earns for sold products.
How do you price your eCommerce products?
Once you’ve decided on what product you’d sell to online, it’s now time to price your products. Here’s a heads-up about pricing though. Pricing is considered to be the most important factor that affects a customer’s decision to buy from you or anywhere else.
And unlike brick and mortar businesses where shoppers are somehow limited to geographical boundaries when making buying decisions – like let’s say you are the only store that sells the product in the entire district – online customers invest time to hunt for the best prices. With the seemingly effortless nature of online shopping, you can even say that customers can buy from anyone, anywhere, across the globe – as long as they can get the best bargains.
Now, having known the behavior of the potential buyers because of eCommerce’s nature, you better have your thinking cap ready when deciding on your product’s pricing. This is where the two concepts we’ve just discussed – price and margin- will come in to play.
Here are three common approaches on how to price your products:
The Cost-Based Approach
Cost-based pricing is the most common type of pricing scheme. The main gist of this method is determining the associated costs with a product then setting a target margin on top of the cost. The result would then be your product’s selling price.
For example, you can buy the product directly from the manufacturer at a wholesale price for a dollar ($1.00) each. And just for the sake of example, let’s say all your other associated cost would amount to another dollar ($1.00). This then means that the total cost for your product is $2.00.
Now, you want to put a target margin of about 30% which should equate to $0.60. Add the cost and the margin together, and your selling price will be $2.60 (don’t forget to add tax, of course). Using this method, the price is broken down as follows: $1 for product acquisition, $1 for associated costs, $.60 for margin, and tax – which depends on your local state laws.
While this type of pricing might seem simple enough, the most challenging part of employing this approach is computing for the associated costs of selling the product. This usually means breaking down bigger operating costs like warehousing, web administration, rent, personnel wages, etc., into smaller, per-product-basis amounts.
The Market-Based Approach
There are millions of eCommerce companies operating around the globe. More importantly, there may be hundreds - or even thousands - of online stores out there that carry the same product as you. With this heavy competition in mind, it might not be a good idea to just decide internally and price your product as if your eCommerce shop exists in a vacuum.
There are forces other than cost, margin, and taxes that determine a product’s price. And this is where the market comes into play.
The market-oriented approach pits your product price against that of your competitors. The concept’s main drive is that your product’s pricing should be close to the price range to those of your competitors while still maintaining profitable. Set the price too high, and you will lose customers to the competition. Set the price too low, and you lose your margin. The challenge is balancing your pricing in a way that your products are priced competitively (as compared to others), yet you still maintain a reasonable amount of margin.
When adapting a market-based pricing strategy, it’s important to always be aware of your competitors’ pricing, and adjust as necessary. While it may seem like a lot of work, the good news though is that you don’t have to do a lot of manual work for this – this task can be automated. There are apps that can help you keep track and analyze your competitor’s pricing and the market’s movement.
The Consumer-Based Approach
The third approach is a consumer-based approach. Consumer-centricity pays more importance to your prospective customer’s behavior more rather than market forces. More importantly, there are two integral things that you should take into consideration when you decide to take on this pricing strategy.
The first important consideration is that you need to exactly know who your customers are. What sites do they frequently visit and buy from? What are their buying patterns? What they look for in terms of an online shop? These are some of the questions you can ask yourself (or ideally - a significant number of your targeted customers) when adapting a consumer-centric approach.
The second consideration is the definition of your unique selling proposition. What makes you different from the competition that will attract loyal customers? Are you valuing giving the lowest price possible to the customers or charging more, yet giving more value-add?
You can say that this approach involves a little bit of science (finding out your customers’ behavioral patterns) and insight (determining your own unique selling point).