One of the first things you need to do when you start your online store is to set your product pricing.
This can often be a confusing and daunting task as your pricing sets the tone for your brand and your products.
At the end of the day you’re running a business not a charity, so you want to make money. And if you’re not making a profit, then it’s essentially just a hobby.
We’ve all heard the sayings “cheap and nasty” and “you get what you pay for” and trust me you don’t want to hear either of those in relation to your products.
Sometimes the reason people can’t sell their products is that they price them too low. They source great quality materials and create a beautiful product, but then try and compete on price with someone that’s imported questionable quality products from China. When someone sees their product and then the low price, they make the assumption about the quality based on the price.
You don’t always have to set your pricing based on costs. Let’s take a look at the following black polo tops.
The prices range from $8 – $3,380 but they are all made from essentially the same amount of material and they are all the same colour. The only real difference (aside from some quality) is the little logo in the corner.
When you’re buying a Chanel polo top, you’re not just buying a black polo, you’re buying the prestige of wearing a polo top that people know cost you thousands.
Although it’s not my cup of tea to spend $3k on a polo, some people LOVE Chanel and they will drop the coin without a second thought.
They are selling the brand, not just the polo. So you need to decide are you selling a commodity – a polo top – or a brand.
When you have a brand you can build a loyal following of people who love your product and are excited to see what you bring out next and have their wallet open ready to buy.
When you’re selling a commodity, you have to compete on price, because your product has nothing else going for it. And as Megan loves to say:
“When you compete on price it’s a fast race to the bottom”
So now that you know you don’t have to be the cheapest to succeed, let’s take a look at what do need to know to calculate your prices.
When you’re calculating your prices you do need to know how much your products are costing you. This includes variable and fixed costs.
Your variable cost change based on your quantity sold. The more you sell the more you can lower your variable costs. To start, set your pricing based on your higher variable costs, and know that when you sell more you can increase your profit margin or reduce your prices.
Variable costs include:
- Branded packaging
- Time to pack and send
- Shipping costs
- Raw materials
- Wholesale prices
Tip: Contact your suppliers and negotiate a lower rate with them. If they say no, ask when and how you can qualify for a reduced rate in the future – get it in writing 🙂
Fixed costs are the expenses that you’d pay no matter what, and that stay the same whether you sell 10 products or 1000 products. They’re an important part of running your business, and the income generated by selling your products needs to cover these as well.
Fixed costs include:
- Your website
- Rent & electricity for brick and mortar stores
- Bank fees
- Software subscriptions
Cost of goods sold is how much it costs you to get the product on your shelf taking into account all of the above.
We like to aim for a minimum 80% profit margin.
You can use this gross profit margin calculator to work out what your retail price should be. As a general rule you want to aim for a minimum GPM of 60-80%. This is so you have money to reinvest in the growth of your business.
Although it is important to do some market research and ensure there is demand for your products, please do not use this as your method for pricing your product.
People who buy based on price are also only loyal to price. So be aware of what the market is doing but set your pricing based on your brand and a healthy profit margin..
The only time this may differ, is if you’re wholesaling products which have a RRP or which many other people stock.
Too many times I see people post in a large Facebook group, usually a business group, full of people who are not their target market and ask them for advice on pricing – please stop. Unless someone is willing to put their money where there mouth is, this is not an effective way to gauge price.
Instead, pre-sell your products before you officially launch. Set your pricing based on all the other factors above and then load them onto your website for pre-sale. Then put your brand out there and see the reaction you get when they have to open their wallets.
Discounting & Shipping
When it comes to shopping online, people hate paying for shipping. So when you’re first setting your pricing think about incorporating shipping into your costs if you can. Then you can offer free shipping, without losing out of profit.
Although regular discounting isn’t a good sales strategy, consider margin for discounting if you do plan on running seasonal sales or discount incentives.
Australia & GST
In Australia, all your pricing needs to be displayed including GST if you are registered for it. You need to either add this 10% on top of your pricing or absorb it. If you’re not registered for GST yet but think you may need to soon, I recommend factoring it into your pricing from day one, then absorb the 10% when you register for it, rather than not including it and then having to put all your prices up 10%. Until you register, simply enjoy the extra 10% and put it back into growing your business.
Own Your Price
When you arrive at your final price, write it down, say it out loud and make sure it feels good for you. If you don’t feel it’s the right price, potential customers will feel that in your marketing. Get comfortable with them, know your value and your worth.
When you set your prices, stand by them. Not everyone will be able to afford your products and that is OK. Not everyone is your ideal customer.
Want to learn more about this topic? Here are some other blogs we’ve written:
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