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Your Ultimate E-Commerce Product Pricing Guide

Written by Tom Ewer on July 11, 2014 How to sell online.

The world of retail business is chock full of secrets, one being how to price your products for maximum profitability.

Price your product too high and your customers may shy away from you. Price them too low and you’ll undercut your profit margin so much that you could wind up in a hole.

Finding that sweet spot as far as pricing goes is crucial for making solid profits and places a certain value on your brand.

Here are a few things to keep in mind when figuring out the ideal price to charge for your products.

Use the Manufacturer Suggested Retail Price (MSRP) as a Starting Point

Product Pricing GuideManufacturers will typically offer retailers a suggestion as to what price point to offer their products for sale to consumers.

This helps to keep prices relatively stable so they don’t dramatically fluctuate from one retailer to the next. You don’t necessarily have to price your products exactly to what the manufacturers recommend, but it might be a good idea to use it as a guide.

Of course, there are other factors to consider when it comes to pricing your products, including how exclusive the product is through your online shop. However, the more typical the product is in the market, the more likely the prices for it will be uniform across various retailers.

Using the MSRP as a guideline can help you avoid having to do in-depth homework about how exactly a product should be priced. On the flip side, this won’t give you a leg up on the competition, since you don’t have total control over the prices offered elsewhere, as well as the availability of the product.

How Does it Cost You to Stay in Business?

You’ve obviously got to factor in the costs associated with product development and delivery, not to mention your overhead and advertising expenses. Even your utility bills associated with running the back-end shop should be factored in, as well as the cost to run the internet and even the telephone.

Are you a dropshipper, or are you crafting your products by hand? Do you have extensive inventory warehouses, or are your products being shipped directly from the supplier? How much are you spending on marketing your products? Are you paying anything for labor and sales? As you might’ve guessed there are a whole range of expenses that go into running a business.

You might want to start off determining what your break-even point would be. Then you can establish a reasonable margin and markup in order for you to comfortably make a profit.

The Business of Keystone Markup

The vast majority of retailers tend to use what’s known in the biz as “keystone” pricing, which basically just involves doubling the wholesale price of what you paid for your product. So, if you bought handbags from your supplier at $20 each, you would turn around and sell them for $40 each based on these ethics.

Small-scale retailers must markup their products by at least 50 percent in order to make a decent profit. Although at first glance this might sound like highway robbery, there are other fees and expenses eating away at your margin that you need to make up for with this markup in order to walk away with some level of profit.

On the occasion where you have to markup your products for less this keystone amount (such as when the competition is a little more fierce) be aware that taking this road could potentially leave you with very little at the end of the day. Though you may be able to make some of this up by marking other items you’re selling for slightly more than double the wholesale price.

Are Consumers Willing to Pay That Much For it?

How much you charge for a product you are selling will ultimately come down to how much people are willing to pay for it.

This is known as market value. Much like how home owners and realtor price houses for sale based on market value – or what others are willing to offer – retail sales works in much the same way. It’s not just a matter of what you think is a fair price to charge; it’s a matter of charging what consumers are willing to spend on what you’re selling. And believe me, knowing the difference can make a big impact.

Don’t Use Under-Pricing to Build Brand Attention

Many retailers might consider under-pricing their products in order to garner some attention from customers, and hopefully pick up some sales. However, this could prove disastrous.

Consumers are savvy, and will raise an eyebrow if they see a price for a product that’s considerably lower than the competition’s. Consumers want to be sure that they’re spending money on something valuable. Charging dirt cheap prices will only help to undervalue your online business.

Over-Pricing Can Be Just as Bad

Consumers are always comparison shopping to make sure they are getting the best price for a product. As bad as under-pricing your product can be for business, it’s just as bad if you jack up the price on your products too far in an attempt to increase your bottom line.

If you decide to increase the price tag a little too much, you risk a plummet in sales. Over-pricing products is a mistake that newbie online businesses usually fall for. They’re looking to recoup their startup costs as quickly as they can. I get it. But ask yourself if you would be willing to pay that price for the product you’re selling. If you wouldn’t, chances are your customers won’t either.

What is the Competition Charging for the Same Product?

You might want to have a gander at what your direct competition is charging for the same or similar products when you’re trying to come up with a price tag of your own. Actually, you have to look at what your competition is charging, because your customer has already done that. It’s probably a good idea to be a little more savvy in your market than your customers, wouldn’t you say?

Checking to see what others are charging can help you gauge what your prices should be hovering around. Are your products and services exactly the same? Do you offer something a little extra? Is there something your products may be lacking in comparison? The answers to these questions can help you decide where your prices should be relative to your competition’s. Make sure to take your costs into consideration, as well as any geographical differences. What products are worth in one location may be different than what they’re worth in another.

Conclusion

There are a lot of grey areas when it comes to pricing your product for maximum profitability. These are just a few suggestions about how to go about setting the right price for your product, but you’ll most likely find that a lot of trial and error will be necessary. Just make sure to try and find that happy medium between what consumers will pay and what will provide you with decent revenue.

Have you used any of these strategies? Have they worked for you? Do you have any other thoughts on effectively pricing products for sale online? Feel free to let me know in the comments section below!

Image source: psyberartist

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