Before you launch your eCommerce business, you need to establish your product pricing. By now, you’ve probably already scoured the internet and read various articles about all the factors that are key to reasonable pricing. It’s easy to fall into a spiralling hole of thoughts and opinions about how much everything should be, and in the end, you’ll be left none the wiser and all the more confused. If you’ve picked up anything from what you read, it must be that there are a lot of factors that will determine your pricing.
What you should know is that pricing is not a one-time decision. Pricing is affected by everything from your business finances, product positioning in the current market, and a slew of other considerations. Is your product something that people will want and need for a long time? Is it trendy or timeless? Are you launching something unique in the market? All of these questions and more will play into your pricing.
The best solution is a straightforward one—set a base price and go from there.
Here is how you can find your ideal starting price:
Calculate the Variable Costs
Before anything else, you have to know all the costs involved in producing what you’re selling and getting it to the customer’s hands.
eCommerce businesses that order products from a third party supplier will have a much easier time understanding the costs of their goods. If your products are made in house or by hand, you’ll have to evaluate every marginal cost that goes into production. This should include electricity, time and labour, transportation, raw materials, and so on.
Once you have a good idea of the cost of goods sold per item, you can better picture how much to price your product to break even.
Add a Profit Margin
When you understand and have a good number for your variable costs, you can now include profit into your price. A reasonable profit margin varies depending on the industry and type of goods sold. As a general rule of thumb, 10 per cent is considered the middle ground, while 20 per cent would be high, 5 per cent is low.
Before adding your desired profit margin, consider two things. First, there are other fixed costs beyond your variable costs. You will have to cover other expenses such as taxes, shipping, customs fees, and more. Those will be a constant once you start running your business. And second, you also have to consider the market’s idea of acceptable pricing. Make sure that your margin falls within a price that your customers can afford, and your product or service can justify.
Test and Observe the Pricing
Don’t delay your eCommerce business because you can’t settle on the right price to set your products. If you’ve calculated all the costs properly and considered all the factors, the best you can do is test it out on the market and see how it performs.
You can only learn by doing. After all, product pricing rarely stays the same. Once your product or service is released, the price can shift higher or lower depending on many factors. Prices will evolve with your business; as long as the price covers your expenses and generates some sort of profit, you can rest assured that you’re on the right track.
The market can be very unpredictable, so you should understand that the price you set when you launch does not have to be permanent. The easiest way to go about your pricing is by setting a starting price.
An essential factor you must consider when deciding on pricing is sustainability. Before you can worry about anything else, you have to ensure that the price you set will help your business grow and scale in the future.
You don’t have to use the price you launch with forever. Depending on how your business performs from there, you will likely have to adapt and develop smarter pricing strategies.
Finding the right price can be tricky, but with time and help, your business will grow. Allow our eCommerce business advisors to help you find success. The Ecommerce Accountant is an online accounting firm that offers various services such as accounting, consulting, tax compliance, structuring advice, and more. We aim to help clients minimise tax, increase profit, and achieve goals. For more information, contact us today and let us know how we can help you!