How to get the best from your product pricing
When you’re starting a business, product pricing is one of the biggest things to consider pre-launch. While there are some aspects of your business that you can improvise, adapt, and learn as you go along, your product pricing isn’t one of them. Getting it right is essential – and so in this post we’ll be taking a look at some of the key things to consider when setting your prices.
Before you start pricing your products
Forewarned is forearmed – and doing research before you get started is key. Choosing products at random, or simply those that you like personally isn’t likely to be a successful strategy – and neither is your pricing. Here’s our checklist of things to know and understand when you’re choosing your products, and starting to think about how to price them.
Know your customer
Customer research will have a massive influence on the way you choose the products for your business, and in the way you price them.
If your target customer is more likely to buy aspirational or premium items, you are more likely to be able to charge a higher price, whereas if your inventory is likely to appeal to bargain hunters and customers that consider price the most important factor in a purchase decision, you’re going to need to price accordingly.
This isn’t the case for each and every type of product however – so be sure to consider the other factors that we mention here.
Know your business costs
When you’re setting prices for your products, you need to factor in costs for your business as well in order to avoid selling at a loss – it is a fundamental rule of business! We’ll get further into these shortly, but a few things that you’ll need to consider include:
- The cost of the products from your supplier
- Marketing costs (including marketplace fees)
- The operating expenses for owning and running the business
- Any debt payments that need to be covered
- Salary commitments or staffing costs (including your own salary!)
- Return required on the capital that has been invested (whether your own capital or that of shareholders)
- Allowances for future scaling of the business and replacing assets when required
If you’re at the start of your business journey, then there are free online product pricing and profit margin calculators that you can use to give yourself a decent estimation of how to price your items. However, these don’t always account for every other cost that you need to factor in – so while they can be a good place to start, they don’t always give you the complete picture.
Know your revenue target
How much do you want your business to make for you in a year? Of course, when starting a new business, the aim for most is likely to be ‘as much as possible’ (or a huge figure that reflects that) but setting a realistic target means that you know how many items you need to sell at certain profit margins. So, if you’re aiming to clear £100,000 in profit, you’ll need to sell 100,000 items at £1 profit each – which is 1923 items each week, or 274 items a day.
It isn’t as simple as that though of course, because you won’t just have one product, and you’ll have different amounts of profit possible on different items. But having a clear, and achievable target to aim for means that you can ensure you’ve got the right balance of products in terms of low profit, high demand and high profit, low demand.
Know your competition
Knowing how much your competitors are selling similar items for will help to inform your initial pricing strategy. Being able to identify what your competitors are doing means that you can build on their strategies. Which products do they have on sale? Are you able to offer lower prices on the items that they are selling at full price?
It isn’t a case of knowing your competition as you set out either. Keep a close watch on what they’re doing, since they will be changing their strategy regularly too. Check their stores regularly, but also be sure to follow your competitors on their social media, and so on. Although you’ll be adding an extra follower to their accounts, you’ll get insights into what they’re up to, and you won’t miss any of their updates, meaning you can respond and adjust your strategy to make the most of their activity.
Know the market outlook
Nobody knows for sure exactly what the future holds (few of us would have predicted the pandemic!) but you can keep an eye on where the market is headed by keeping tabs on industry news sources. We recommend visiting Tamebay regularly, and finding other sources that appeal to you and that make sense. Our weekend reading posts are worth checking each week too (whether you read them at the weekend or not!) since we pick out many links that you might have missed, and put them in context.
Keeping current of market developments means that when new technology is released – such as a new eCommerce functionality on a social media channel, for example – you’ll be prepared to take advantage of it immediately, and you’ll already have a good idea how to price items on those channels too.
How to price your products
Although pricing products is something of an art, there is some guidance that can help you to find the right price for each item to start with. Once you have the price of the item from the supplier, then:
Identify your variable costs (per product)
Add your fixed costs
Add a profit margin
That figure will become your approximate retail price for customers. However, as we’ll see in a moment, this isn’t necessarily everything you need to consider.
A common mistake that businesses that are new to DropShipping make is to only consider the cost of the items they sell when they’re setting prices. But there are other costs that must be taken into consideration, including your time – you need to be able to pay yourself!
Other costs you’ll need to take into consideration include shipping, marketing costs (particularly if you’re using paid ads as a strategy, but also the time taken to create marketing assets), and any additional promotional costs. These may be small costs per item, but they add up, and you need to ensure that you (or the business) doesn’t end up out of pocket.
Fixed costs are the costs that are essential for your business, and will need to be paid whether you sell one item or a thousand items each month. You’ll need to add in costs like business insurance, utilities, accountancy fees, website hosting fees, and any smaller costs that may be incurred when you’re sourcing your products, like your Avasam subscription.
Your profit margin
When you’ve determined how much your variable costs are, you need to add the profit margin on. While it can be tempting to add a flat profit margin across all your items (such as 20%), that won’t work for all items. Partly because your costs may end up being greater than your margin (in some cases) but you also need to consider what your competitors are charging, and the market in general. If the profit margin means you’ll be twice the price of other online sellers, customers simply won’t buy from you.
Pitfalls to avoid
You can’t always avoid getting tripped up by something when you’re starting a new business, but there are two really common mistakes that new business owners are prone to making – under pricing, and over pricing.
The concept of ‘loss leader’ pricing is widely known – it has been used by many household name retailers for years to build hype, and encourage customers to visit stores to get a bargain. The idea is that while customers are in the store buying the loss leader item(s), they will buy full priced items while they are there – potentially that they need to complete the purchase of the loss leader item.
While having a number of products available as loss leaders may encourage customers to visit the listings for your website, becoming known as a discount retailer, or always having low prices for certain items means that customers are much less likely to buy from you at full price. That effect doesn’t take long to kick in, either, and that is going to impact your overall profits and long-term sustainability for the business.
Even when the economy is in a recession, businesses often try marking products down to lower prices in order to increase the volume of sales. However, customers then may devalue both the products and the business – being seen as ‘cheap’ isn’t desirable, unless you can sustain that kind of profit margin. Customers don’t just want to buy at the best possible price, they also need to feel they are getting the right kind of service, and that they can trust that the products that they buy are going to be worth the money they have spent on them.
Pricing too high will simply drive customers to find an alternative source, and in eCommerce there is no shortage of options available to them. Starting by considering how much you’d be willing to pay if you were looking for such an item is a good place to start, but this is also part of why we mentioned knowing your competition – it really is an easy thing to be able to avoid over pricing.
Not only that, if you over price your items, customers take longer to make their purchase decision, and the longer wait for the customer to make their decision isn’t worth the benefit of the higher profit margin – not least because they’re likely to investigate their other options during this time.
You may be able to use over pricing strategies when you’re selling valuable items – such as items that are highly sought after, and luxury brands. However, this needs to fit with the strategy and the brand that you’re growing – if you source one luxury item but the rest of your inventory costs less than £20, then you aren’t going to get away with over pricing. Customers will only consider paying more for items if they’re getting something they don’t get anywhere else.
Changing your pricing strategy
It should be clear by now, but let us state it again: Setting your prices isn’t a one-time task, or even a once a month task like it used to be in high street retail stores. Online retailers today need to be testing new prices, trying new offers and so on at least weekly, and in many cases, more often than that. Make time to identify strategies to try on a regular basis, and then just as you do with your social media posts, schedule them in advance to see what works, and what doesn’t.
When to change your prices
As times change, you may need to raise prices simply due to costs – with inflation driving costs of your suppliers, and other essentials such as utilities and wages increasing, there is often no option. If you need to increase prices though, planning to do so gradually will be less of a shock to your customers – and mean they are less likely to turn away from your business. That means if you need to increase prices by 10%, dividing that increase into four will be less noticeable for your regular customers.
There are times that you may need to reduce prices too, although lowering your prices to encourage purchases is generally not ideal, unless you’ve made a strategic decision to do so. If you accidentally misread your target customers by pricing too high, then rather than lowering prices immediately may not be the best move – it may reduce trust in your business. Instead, consider offering free gifts with purchases, or offering discount codes to encourage customers to make a purchase. If you do ultimately need to reduce your prices, then doing so gradually means you can see how far you need to push – customers may be willing to pay a little more than you expected.
When your competitors lower their prices, if you’re slow to react, you’ll almost certainly lose out on sales – customers will simply make their purchases from them, rather than you. Similarly, your competitors will react quickly when you reduce your prices too, so you need to be careful not to get into a race for the lowest price.
As we said, pricing isn’t a one-off job. You need to stay on top of your sales figures, your competition, and the costs from your suppliers to ensure that sales continue to come in. Your business depends on every item you sell being profitable – not just the profitability of your business overall.
In addition, you need to keep an eye on what your customers are saying too. Between reviews and your social media, it has never been easier to find out what your customers are saying about your business, or to interact with them and get their opinions. Keep engaging with your followers on your social media posts, and use Story posts to ask them what they want, what they think of your products, and so on.
Your product pricing strategy is arguably the most important aspect of your business, and there isn’t a correct way to get it right all of the time – you can’t be scientific about it, since a lot of it is an art! But by staying on top of your product pricing, you can stay ahead of your competitors, and ensure that you are getting the right balance so your customers continue to shop with you.
If you’re looking for more items to source for your business, without the upfront cost of investing in stock, sign up for your free Avasam trial. We’re adding new suppliers with more products weekly, and we’re adding new functionality too.
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