May 16, 2018

A common approach ecommerce businesses make when pricing their products is relying solely on numbers set by competitors. It’s a strategy that may work for some, but it’s a missed opportunity for most. By disregarding the fundamentals of pricing, business owners are likely not asking for the amount customers are actually willing to pay.

It’s a common mistake you can easily avoid.

The following is a breakdown of the 5 key elements you need to consider to strategically price products for maximum profitability.

Market Research

Set aside time to learn more about your target customers. Understanding them will help you understand their purchase decisions. Look for valuable information such as location, age range, hobbies, average salary or household income, and gender. This data ultimately helps you determine the likelihood that they will purchase your products.

Take a page from the beauty industry.

In 2015, a study from New York’s Department of Consumer Affairs, called “From Cradle to Cane: The Cost of Being A Female Consumer,” revealed that women consistently paid more than men for similar goods, with the highest disparities belonging to personal and grooming products. Some call it the “pink tax” and many companies have used psychological pricing when it comes to the female consumer.

A market research agency can compile the information you need, but their rates won’t be cheap. Instead, consider starting with publicly available information first, such as government wage and employment statistics available on the census website.

Budgeting and Accounting

Do you know the cost of running your business? When setting prices, don’t forget that your first goal is to cover expenses like:

  • Salaries of Full-Time Employees
  • Hourly Wages for Contractors
  • Product Costs
  • Marketing
  • Software

If you’re unsure on how to approach budgeting and accounting, consider purchasing user friendly accounting software or hiring a CPA for help.

Revenue Goals

How much money does your business need to make to break even? The basic formula for finding your break even point is to divide fixed expenses by the percentage of revenue available to cover those fixed expenses. There are other methods for finding this point and you can find an example with several formula and a walk through here.

Maintaining a revenue target for every month, quarter, and year can greatly influence your product pricing strategy. It’s important to set realistic goals for your business and consistently assess if your strategy is working.

Competitive Analysis

As we mentioned from the start, your competition’s pricing should not be your main focus. However, it is an important factor that deserves consideration in your overall strategy.

Competitive analysis is as easy as conducting a Google search for products targeting your key phrases. Look within both organic listings and sponsored results to gauge their pricing strategy.

Additionally, you can use Google’s keyword planner to figure out how much competitors are paying to list their products.

Planning Ahead

Regardless of what you sell, planning ahead is especially difficult for every new business. Having financial projections for the next quarter, year, or even the next 3-5 years will help you prepare for market gains and losses.

Remember, you can always change your projections as the industry changes.

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