How to Price Your Products as an Ecommerce Business

Pricing your products as an eCommerce store owner can be one of the hardest jobs you will ever have in that business. Although price is not always a deciding factor for consumers, as they are often not looking to simply buy the cheapest product, it is always an important part of the equation.

In essence, you need to find the right balance between making profit per unit and the optimal number of purchases. There are many strategies to price your products and help you do the above, but the best way is to mix at least 2 strategies.

Pricing can really make or break your 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 profit and lifetime value.

Before we dive into the strategies, let’s first get the facts straight. You should know the following before developing a pricing strategy or formula:

1) The margins of your products.

This is relatively easy to do. You calculate the cost of each unit of a specific SKU (transit to your warehouse and any other fees included). Then you try different prices and simply follow this formula:

(Price – Cost) / Price

This simple formula will give you your margins for each product. In no case should a price be put on that product that results in a negative number.

2) Advertising cost.

Are you going to advertise your products? You will most likely do it and you will most likely do it online.

You need to add to your costs the cost of advertising to promote that specific product or just split it across all your SKUs.

For example, if you spend $3K each month on Google AdWords to promote your products and your eCommerce store, you should split that among all your products equally.

With those 2 basics out of the way, let’s move on to some simple pricing strategies for old and new eCommerce businesses. Remember that you can use any of them or ideally a combination of them. What works best for you will depend 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 eCommerce stores and physical stores.

The way it works is to simply take the cost of a unit as identified in step 1 (freight and other variable costs included) and then simply add your desired margin on top of that or a fixed amount of money that you feel is optimal. The total amount will be the final price of the product.

The 2 challenges with this approach are that you have to calculate the exact cost of each unit without forgetting any costs and that you have to know that cost to always stay on top of it during promotions etc.

If an eCommerce company has really nailed down their operational side of the business, they can easily use this method with minimal effort.

How much overhead to add is up to you, but typically, employee salaries are left out of the equation.

The second tricky part is how much gain to add. Some of it can be done from experience and some (or all) of it from tracking the prices of competitors selling the same or similar products.

Prices that are too high or too low can cripple your sales. Checking your competitors by hand first and then regularly with software can help you stay on top of them.

Pricing Strategy 2: Market Oriented Pricing

Expanding on the last section of the above strategy, this strategy is also called a competition-based strategy and it takes into account what your competitors are doing and what condition the market is in.

This is a good strategy for commoditized products and if you can compete on price. Usually this is combined with another pricing strategy like #. #1, cost-based pricing. In essence, it helps you identify when to lower your prices to get more sales, but without compromising your profitability from #1.

Not only that, but when your products are too low, you can also increase that price, still be the cheapest supplier, and squeeze that extra profit.

Pricing Strategy 3: Consumer-Focused Pricing

This is also called value-based pricing and is typically for non-commodified products. In these cases, the security is often sold and the price just has to be reasonable.

For example, a novel product that might not have direct competitors may follow that pricing strategy, while highlighting its benefits over older products or other competing products.

Conclusion

Focusing solely on revenue and sales numbers can prove disastrous if you don’t have a solid and profitable pricing strategy. By using pricing tools you can always stay competitive and coupled with the right pricing strategy you can keep your sales and profits at the right level!