Pricing Your Products Offerings
PricingÂ
The Internet has had a profound effect on the pricing of merchandise. Early on, the Internet attracted in-experienced people who simply did not know how to price the items they were offering. They lost money because of prices being too low to cover cost. Others were hopeful that the sales volume would be high enough to allow them to profit with low prices. Still others thought that if they got large enough, fast enough, they would own the market place and then could raise prices. Most of these companies are now gone and reality has began to prevail.
A merchant must sell their products at a high enough price to allow them to cover the operating expenses and still make a reasonable profit. Your online store will have fewer expenses then a storefront operation. You will, none-the-less, have some overhead expense and if you plan on growing the business, the overhead will increase. If you base your pricing on the fact that in the beginning there is no rent or employees to pay, what will you do when employees are needed? I shall propose math formulas that will allow you to make a profit with relatively low sales volumes. Then as you grow your sales you will be able to afford the increasing overhead cost.
We touched on pricing elsewhere in this book. However, we will be covering the basic concepts here, because pricing is vital to your success. You will have to make a choice, offer the lowest prices, or offer fair prices and great service. You cannot do both for very long. If you plan on staying in business for a long time, quality goods, fair prices and great service will serve you and your customers much better then low prices.
You are not setting the prices! The industry you are in and the Internet is setting the prices. Here is the reason this is true. Your customer is buying from you to save money or to get more for their money (This is not always true as some times they can not find the item locally). If they order from you it is most likely because you are at a lower price then their local retail store. Your job is to find out what the local stores are selling the products for and buy the products cheap enough so that you can sell the item at a price that will allow the customer a savings and still allow you to make your needed profit margin. How do you do that?
You check with the manufacture to get your cost, you estimate the freight cost to the customer (I average the shipping cost to three cities, NY, Chicago and LA). You then check the local stores pricing. Then you set your prices at a level that will allow for the profit margins you need.
The question is will the product sell at that price? In most industries pricing practices are similar all across the country, the prices at your local store will be similar to other stores selling the same brand or item. The way you learn what price (mark-up) is common in your chosen industry is to visit stores to check prices and by asking the manufactures and representitive what markups are traditionally used in your industry group. Additionally, you search the web, but only for a general feeling of what the competition is doing. Do not assume the competition is correct, or that there is too much competition. Look to see what their selection is, what brands they are offering, what can you do better? Can you offer more selection? more customer help?, different brand names? A more user friendly and informative web site? and so on.
Retail TerminologyÂ
For our purposes here we will use markup from the selling price down. Thus a 50% markup is two times our cost. When we say mark up, we mean of the selling price.
Mark up: The difference between the selling price and your cost. For our purposes here we will determine mark up or margin from retail price down. For example; an item selling for $1.00 and costing $0.60 will have a profit margin or mark up of 40% ($1.00 - $0.60 divided by $1.00 = 40%)
Keystone: A mark up of 100% or double the cost of goods.
COG: Cost of goods, for our purposes here is. The cost of the item from the manufacture plus, freight to you, plus any drop ship fees, import duties, and other direct cost of the item such as crating. Note: Freight to the customer is included in the cost of goods if the customer is not paying the cost directly.
Expenses: Everything else is expenses.
Items such as general overhead, shipping pallet, packaging tape, shipping labels, etc.
Gross profit: Profit before expense are deducted.
Net Profit: Profit after expenses are deducted but before income tax.
Discount: The dollar amount or % that is deducted from the selling price.
Retail Math example:
The math is as follow: Cost + Freight + Cost of Goods Sold (COG).
Mark up % is figured as follows: The selling price less (-) COG, divided by the selling price, = mark up percentage (%).
Examples:
Cost Of Goods
Item Cost $100
Plus Freight In + $7 =
Total Cost $107 (COG)
Gross mark up percent (% Profit Margin)
Selling Price $200
Less Discount - $40 (20% customer savings) =
Sale Price $160
Less COG -$107 =
Gross profit dollars $53
Divided by sales price $160 =
Profit Margin 33%
Examples:Â
Price formula, for specialty products sold in specialty stores (for example a baby goods store, or hobby shop). This formula will give you a place to start.
COG Times 2 = Retail Selling Price
Example: An item with a COG of $130.00
Retail 2 X cost $130.00 = $260.00
Less discount 15% - $ 39.00 =
Sell for $221.00
Less COG - $130.00 =
Gross margin $ 91.00
Less shipping cost - $ 35.00
Profit $ 56.00 (25.3%Â margin)
If the item is light weight and compact so that shipping cost is only $12 then your profit margin would increase to 35.7%. As you can see shipping cost can have a huge impact on your margins.
Example:
Here is the same example but with a charge to the customer of 5% for freight.
An item with a COG of $130.00
Retail 2 x $130.00 cost = $260.00
Less discount 15% - $ 39.00
Sold for $221.00
Add 5% shipping + $Â 11.00
Customer Pays $232.00
Less COG - $130.00
Gross margin $102.00 (41%)
Less shipping cost - $ 35.00 (actual freight cost)Â
Profit $ 67.00 (29.% margin )Â ($67 divided by $232)
There is no easy answer of how to price products, I recommend you start with a doubling of your cost and then use discounts to adjust the price based on how much the customer spends. If they spend less then $400 dollars use a lower discount then if they spend $1500 dollars or more. Some items are large and expensive to ship and you will need to quote the price plus shipping. Start with the suggestions here and adjust as your experience dictates.
Another method is to start with the prices the competition on line is using and figure your profit margins. If the margin after shipping is 30% or more, start there and adjust the sales price after a few sales are made and the actual cost can be determined.
Mark-Ups, Rules Of Thumb.Â
After all is said and done your goal is to reach a selling price and sales level that allows you to offer good service and still make a reasonable profit while growing your business.
Here are some rules of thumb to give you a starting place. Freight will affect your prices.
Expect freight to average 10% plus or minus a little over a month (this assumes you have some sales volume) keep within the #4 & #5 minimums shown below after shipping cost.
1. Name Brand Products Cost times two (keystone)
2. Non Name Brands 40% M.U. or more (cost X 1.67)
3. Services Three X cost
4. Minimum Gross Margin 33% of the selling price after Discounts
plus all shipping cost. (COG X 1.5 = 33%)
5. Large Ticket Items or large total sale 25% of the selling price after discounts
About Lowering Prices?Â
If you sell $1,000,000 at a 25% margin, you will have $250,000 from which to pay the bills and build your business, that is a reasonable number. If you sell forty product lines, each doing $25,000 per year, that is one million dollars. If you divide $1,000.000 buy 365 days, you need to sell $2,740 per day to reach one million in sales
.
What happens if you then lower your prices 10%? If you lower prices by 10% your $1,000,000 becomes $900,000 in sales. Your profit is now only $150,000 from which to pay the bills and build your business. You will need to increase your business by $600,000 just to get back to that $250,000 you had before you cut the prices by 10%. In other words you would need to increase your sales by 67% just to keep the same dollars of gross margin coming in. Any time you are considering lowering your prices remember this little exercise and consider the impact it will have on your bottom line. Below a 25% margin of profit you are you are taking big risk.
When Sales are Slow?Â
So what do you do when sales are slow? There is no easy answer. We recommend that you have a large selection of merchandise so as not to be dependent on one product or line. At least 70% of what you will offer online will not sell and some items will not take off for months. Your price and your profit margins should be the last thing you are willing to reduce. Try everything else first, before you lower that price. Here are some questions to ask and some examples to help illustrate that point.
Questions when sales are slow? "it" means item or category of items
1.Would a limited time special help?
7. Can you advertise or promote it?
2. Should you offer a free gift with it?
8. Should you lower the price?
3. Should you package it with another item?
9. Should we change brands?
4. Should the item be dropped?
10. What is the competition doing?
5. Is this a one time deal?
11. Is the Information i have accurate?
6. Is this a leader item that gets other sales?
12. What if I do nothing?
We offered a table tennis table on our web site selling at $640 with a 10% discount and free shipping. It was selling slowly and one of the national chains was offering a similar table at 40% less. We changed our pricing to $640 with a 20% Discount, plus 5 % shipping. The perceived value to the customer was 20% off the $640 or $128 saved, plus no sales tax. We knew the local stores do not stay in stock year round and we now had a slightly better table at very little additional cost.
Another example: A manufacture had stopped drop shipping his products at a very busy time of the year. This caused us extra shipping and handling expenses, as we had to ship first to us, then to the customer. We raised our prices 10% to protect our profit margins until we could re-calculate that companies entire product line. We then looked for a freight handling company who could reship from a closer location. In the mean time the new 10% increase protected are margins while we made new shipping arrangements.
In another case, we sell umbrella stands that are heavy and therefore expensive to ship. Our prices were too high due to the shipping cost. We solved the problem by having two prices, when the customer orders the umbrella stand with an umbrella and they get a 30% lower price on the stand then when they order the stand separately. We include a notice on the web site to explain the shipping cost problem and we always advice the umbrella customers to get the stand with the umbrella. We tripled our stand sales. The customers now understand why our prices are high and the phone sales people tell the potential customers to try locally first and if they cannot find what they need to please come back to us for the stand.
Remember every time you think or worry about the competition, go look in the mirror, someone else out there thinks you are the competition.
Disadvantages To Offering DiscountsÂ
Some customers do not like discounts off a regular price. Some customers do not like or will not do the math. And some customers will totally miss the discounts and think you are higher priced. Over all I think the advantages out weigh the disadvantages. We show discounts on our web site and always try to quote both the regular or list price and the sale price to a customer. We do this to give the customer a reference point.I might say "The price for your new patio set is regularly $1,985. Our Sale price is $1,747 .
Next?
Now that you have your items and a pricing plan it is time to begin that web site.
"Web Site Basics"
"Set your own path, and be a leader, let the others follow your way" Jim Glasgow