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Everything you need to Know about Pricing during e-Commerce Store Development

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Jun
06
2018

Pricing your product is one of the noteworthy decisions you will have to take because this can greatly affect your business almost completely. Your pricing is the key deciding factor in everything beginning from your cash flow up to your profit margins to which expenses you can afford to cover. 

This is the reason why it is too easy to be stuck on pricing while you are launching a new product or online store, but it is important that this should not stop your plan of launching a store at the end.  The best pricing data you can get is from launching and testing it with real customers. However, you still have to begin from somewhere with a price that will really work out.

In this article let’s give you some insights on how to price your products and what to focus while getting started?

It's no wonder that you will not get a very clear idea while you start searching for a pricing advice. Pricing is the key to your business starting from the business finances to your product’s positioning in the market. This is the most strategic decision you should make for your business. But this is not a one-time decision you should adopt. If you are trying to find a price for your product there is a comparatively quick and direct way to set an initial price. And keep in mind just because it is the initial price you set for your product and doesn’t mean that it is the price that you are going to use ever after.

To set the initial price, combine all the costs involved in bringing your product to the market and set a margin amount on top of all the expenses. If you feel it is too simple to be effective, just see how it works:

Why Does this Kind of Pricing Approach Work?

The most important element of the price you set is that it will help you in sustaining your business. If you price your products on an unsustainable profit margin or on a lower side, you are not going to survive and it will be challenging to scale your business.

The next important factor your pricing needs to account for is that you should be priced relative to your competitors like what your pricing strategy is for your business and your customer's expectation.  But before worrying about all that you must make sure that you have found a sustainable base price.

Calculating a Sustainable Price

There are three straightforward steps to calculate your price:

1.    Add up your variable cost (varies according to product)

First and foremost you need to understand all the costs involved in getting each product to the market doors. If your product is ordered you‘ll have a straightforward answer as to how much each unit costs, which is the cost of your sold goods.

Once you make your product, you will have to go deeper and look at all the raw materials. How much does that bundle cost and how many products can be created from it? This will give you a rough estimate of your cost of goods sold per item.

However, keep in mind that the time you spend on your business is very valuable. Therefore to price your time, set an hourly rate that you need to earn from your business and divide them by how many products you can make at that particular time. Therefore, while setting the sustainable cost to ensure that the hourly rates are added as a variable product cost.

Your pricing can be done in this way, say,

Cost for sold items                          $4.25
Manufacturing time                         $3.00
Packaging                                       $2.78            
Promotional materials                     $1.75
Shipping                                         $5.50
Affiliate commissions                      $3.00

Total cost per product                    $20.28    

2.    Add a profit margin

Once you have a figure for your variable cost per product sold, it’s time to build a small amount of profit into your price.

Suppose you want to earn 20% profit margin on your goods over the variable cost. Remember two things while choosing this profit percentage

1.    Your fixed cost is not included yet, you will have costs to cover beyond your variable cost.

2.    You should consider the overall market and ensure that your price within this margin still falls within the overall acceptable price for your market. If you are charging two times that price of your competitors then the sales will be very challenging for you depending on your product category.

Once you are ready to calculate a price, take your total variable cost and divide them by 1 minus your desired profit margin expressed as a decimal. For a 20% profit margin that’s 0.2, you can divide your variable costs by 0.8.

Now your product’s base price will be $25.35 which can be rounded up to $26.00.

Target price= (Variable cost per product)? (1- your desired profit as a decimal)

3.    Coming to Fixed costs

The variable costs are not your only cost. Fixed costs are the cost you will have to pay regardless of whether you are selling 10 0r 1000 products online. This is an important part of your business and they are covered by your products sales as well.

When you are choosing the price per unit of an item, then it's hard to find out how the fixed costs fit in. A simple way to find out this is to take the information about the variable cost you have gathered earlier and note them in the calculator spreadsheet. 

Now your fixed price and your variable price are at one place and you can see how many units of a single product you need to sell to break even at your chosen price. These findings help you to make an informed decision about the balance between the fixed cost and setting a manageable and competitive price.

Test and Iterate Once Live

Don’t be afraid that the price you chose must be wrong and don’t pull yourself back from launching a store.  Pricing is always going to be something that evolves along with your business, as long as all your expenses in selling the product are covered and you also earn a profit. You can test this every now and then and can adjust to run the business.

Adopting this approach gives you a price you can feel confident about because the most important thing in pricing is that, it should be able to help you build a sustainable business. Once you get it you can launch a new online store or a product and get feedback from your customers to adjust your pricing strategies in the future.

 

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