Setting prices for your products can be one of the most puzzling and stressful aspects of running an online store. Price them too low, and you might make sales but not much of a profit. Price them too high, and you might scare off potential customers.
Hitting that elusive pricing sweet spot is tough, but we’re going to help you crack it.
What are your costs?
Costs encompass far more than the unit purchase price you get from your supplier or the aggregate cost of materials that go into manufacturing your product. Despite the popular assumption that “selling online is free,” traditional retail expenses like salaries, warehousing, order logistics and marketing are a huge part of running an online store. You’ll also incur a few extra costs as an online merchant, including platform and hosting fees plus any apps or other services you may want to use.
It’s time to write down everything you will pay for as an ecommerce business, putting each aspect under the microscope, from the creation of your online store to when your customer receives your order and beyond, including return or exchange logistics and follow up marketing.
What is your target profit margin?
Once you’ve tallied up all the costs that go into developing, manufacturing, delivering, and marketing it’s time to calculate your target profit margin. While it’s tempting to build hefty margins into product prices, you also need to be competitive.
So, you need to calculate a profit margin that makes sense for the success of your business. To do this, you can do the math yourself or you can play around with Shopify’s profit margin calculator. There is no one answer when it comes to creating a profit margin for your ecommerce business and it will likely change a bit over time as the market fluctuates and as you streamline your business operations. The key is to create a margin that is reasonably competitive, covers all your costs, and makes it worthwhile for you to run your online store.
Keystone pricing is a good benchmark for many businesses, where you essentially double the cost of a product to arrive at a 50% markup (and a 33% profit margin). However, in many instances such a high markup is unfeasible (consumer electronics, for example), while in a few others the keystone markup can actually be too low (fine jewelry, for example).
Who are you selling to?
Before asking yourself what your customers will pay, you need to understand who your customers are. Creating one or two personas of who your ideal customer might be is a great way to envision their life’s circumstances and how that might affect how they view your product.
Are they likely affluent shoppers searching for aesthetically pleasing homewares? Are they budget-savvy trend hunters? Maybe they’re fitness aficionados who value quality above all else, including price. Whatever the case may be, they will be the people buying your products, so focus on what's important to them.
What are your customers willing to pay?
Once you have some idea as to who you’d like your potential customers to be, it’s a great idea to conduct some market research among real people, either an existing customer base of yours, potential customers, or even people you know who might become customers. A quick survey is an easy way to gain some valuable insight into your customer’s buying habits.
QuestionPro has a basic template that will give you an idea of some of the types of questions you might ask, but keep in mind that consumers will naturally choose lesser amounts than they’re willing to pay in the real world if presented with multiple price-points. A much better approach, as Tyson Gingery of Inquisium suggests, is to “ask some respondents if they will pay price x and others if they will pay price y, and then compare the results of the two groups.”
Whether you outsource your market research or conduct it yourself, most companies find that their customer base consists of two or three distinct groups (for example, the bargain hunters, the convenience shoppers, and the luxury set). If you decide to go after a price-sensitive segment, you’ll price your products lower and make that a big part of your value proposition. However, if you decide to go upmarket, your value proposition will be very different—rather than highlighting deep discounts or savings bundles, you might shift the focus to the quality or exclusivity of your product.
What is your competition doing?
These days it’s all too easy to comparison shop, with search engines often displaying competing products right next to each other. With that kind of convenience, you can’t really blame your customers for shopping around—in fact, you’d be wise to do the same.
According to Tim J. Smith, founder and CEO of Wiglaf Pricing, there are three important questions to ask yourself when it comes to assessing the competition: Who provides an alternative to my product? Is mine better or worse? And does the customer care? If your product is superior, highlight what makes it so and price upwards. If yours isn’t quite as good, undercut the competition and price downwards, luring customers away from their store and over to yours.
As your competitors’ prices change, so should yours. Thanks to automated price tracking software like Prisync and Skuuudle (among many others), keeping apprised of price fluctuations in the market isn’t nearly as frustrating and time-consuming as it used to be. These days, you can monitor up-to-the-minute price changes from your competitors and respond to them immediately—not only by dropping your price the instant the competition does, but also by raising them when you think it will be to your advantage.
Depending on the industry your ecommerce business is in, you might not need to constantly monitor price changes, but it’s something to keep in mind as your business grows.
Need a little more help?
If you’ve answered the questions above, you likely have some hard numbers and valuable customer data that, when combined, should give you a good idea of how you’d like to price your products. Even so, it’s nice to compare your pricing to some traditional ecommerce pricing models. We recommend checking out Shopify’s 13 Pricing Models to give you an idea of some tried and true pricing strategies, but keep in mind that not every strategy will be appropriate for your online store’s industry.
Find more helpful articles in The ultimate guide to starting an online store.
