One of the largest pain points for many sellers is calculating the correct pricing for their products. Finding the right pricing for profit is challenging to say the least. Especially in these times of uncertainty with costs rising from raw materials, to shipping, to warehousing. By the time you get the product to promote and sell on your ecommerce site or retail store, you’re not sure what price to put on it.
First, let’s look at ecommerce vs a physical location…
Ever since the pandemic, the shift to purchasing online is significant.
“Ecommerce penetration worldwide increased from 16% in 2019 to 19% in 2020, driven by the pandemic-fueled shift toward online purchases, according to a report from the United Nations Conference on Trade and Development (UNCTD).” Source
And ecommerce is not going anywhere anytime soon.
Retail brick-and-mortar stores have a lot more overhead expenses than an ecommerce business. For a physical location, you have to factor in rent/mortgage, utilities, employees, repairs and maintenance, etc. Not so on an ecommerce business.
Shoppers are planning to shop omnichannel
65% of shoppers surveyed recently plan to spend the same amount or more compared to 2020. 50% of shoppers claimed that COVID-19 has influenced them to shop even more online and nearly half of respondents said they plan on increasing their usage of new shopping options like buy online, pick up in store this holiday season. And 45% of consumers do plan to shop the same amount in store as 2020. Source
Cost of Goods (COGS)
A sales price has to consist of your COGs (cost of goods), labor, overhead and profit. But it is not as simple as that. For example, if a product is very slow moving, you have to account for the carrying cost associated with holding inventory for a long time. High volume businesses such as Walmart can significantly lower prices due to high turnover rates.
Frequent mistakes are made in not including all the costs associated with COGs. For instance, did you include the shipping and taxes you paid to source the materials and the cost associated with manufacturing it that were not labor or overhead? If you are an ecommerce business, ie., selling clothing, are you taking into account that on average, 40% of all sales will be returned (over 60% during the holidays). Those return costs have to be covered by the initial pricing.
Another big area of incorrect calculation is related to labor. Many businesses make the mistake of adding on only the actual hourly labor cost. But if you have full time employees you also have to add in “loaded benefits” such as insurance, vacation and sick leave. This is usually about 40% of the wage, so each wage calculation needs to be increased by at least 40%. Do not include management labor as that is covered by overhead.
Subsequently, if you don't have employees, you need to figure your wage calculation based on what you think your worth is.
Much pricing is dependent on the people you are selling to. Some people want a basic car that is reliable and gets them where they are going and are willing to pay up to $15,000 for a good used car. Meanwhile, the next person wants not only to ride in style, but to be seen as someone of importance and is willing to pay $45,000 or more for a luxury car. So, it is important to know your audience.
What’s the Right Price?
Right now, there is no perfect formula that is correct for all businesses.
If it’s too high, will consumers buy it? Again, it depends on the target market. High-end consumers have the money and don't mind spending it, if they see value, prestige, extra service, etc.
If it’s too low, how will you make a profit? Should you lower your prices to sell more?
That is not selling profitably. It’s not even a marketing strategy. Sure, you can have what’s called a loss leader. That’s a popular strategy especially with supermarkets. For example, a dozen large eggs advertised at $0.99. Where are the eggs usually located in a store? Way in the back. Usually, the shopper who wants to take advantage of that great price will inevitably pick up other items either on the way to the dairy department and/or on the way out.
Obviously, that’s not going to work on an ecommerce site unless you bombard people with pop-ups. That ruins the user experience and they’ll leave without buying anything.
A strategy that does work for ecommerce and retail stores is a discount for first-time shoppers to entice them to make that purchase. Or giving away a gift card. However, you need to watch the amounts. For instance, if the majority of your products are priced say, over $25. If you give the person a $10 discount on their first purchase, they many just buy one item at $25, use their discount, and you’ve made $15.
The key here is to put a dollar minimum for the total sale. You’ll see these on most offers these days. Like, free shipping on orders over $———. Or $10 off your first purchase of $50 or more. Now, that makes a difference and it makes sense.
Many Pricing Problems Stem from Sourcing Challenges
Where are you getting your products?
For instance, Under Armor, the sportswear company is having difficulty getting their products from their manufacturer in Vietnam. Yes, manufacturing in Asia may cost less, but, these days, getting the finished products from there to suppliers, and finally to your store, is now a problem.
The answer is to source as locally as possible.
If you’re in Arizona, check out Local First Arizona’s Source AZ program. Sourcing locally, saves money in the long run, you get your products faster, you have faster turnover and the money stays in the state.
"The vast majority of what we sell in writing is manufactured in the U.S." Peterson said on the company's Q2 earnings call. "So we are not in the business of dealing with ocean freight, port issues, availability of raw materials and components as we are on some of our other businesses.” Source
Here are some resources from around the web, as well as the SCORE website...
- The Power of Pricing - On Demand Webinar
- How to Raise Prices without Losing Customers
- Pricing Products and Services - Course on Demand
- USPS Rate Surcharges for the 2021 Retail Season
- UPS Announces Surcharge Increases ahead of Peak Season
- What's Going On With Shipping Rates?
- Surviving the Retail Recovery: Tips as the World Reopens
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If you need help pricing your products, a SCORE mentor can guide you! Click here to schedule a FREE session....
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