With every ecommerce store, the pricing can mean the difference between success and failure.
It's pretty challenging to know what's reasonable for you and your customers, right?
Even more challenging is that different product variants, such as size, can differ in manufacturing costs and pricing.
Why does that matter? Let's read on!
Why does pricing matter?
Price is usually the first thing the customer wants to know about the product and let that determine if it's worth buying, especially with different versions of the product.
That's why store owners have to understand their pricing and what will make it worth it to the customer.
Pricing also matters in the competition of what everyone else is selling their product at and the brand value of your business.
Different pricing strategies are based on what makes sense for you and your customers based on those two things.
Let's look at what these pricing strategies are.
Six ways to find the best selling price for your products
Pricing is never a random number. Success in pricing involves knowing your manufacturing costs, profit margins, and other costs to keep you in business.
Regarding manufacturing costs, let's look at one of the most common pricing strategies!
1. Set pricing based on manufacturing costs
Setting your price for product variants based on the manufacturing costs alone doesn't always create the most straightforward strategy, but it's a good starting point when you don't have anything else.
A common practice is to find out all expenses that go into the product and the logistics of getting the product to your customer to find a price that covers all those costs while being profitable.
That said, here are the basic costs you'll have to pay.
- Manufacturing
- Shipping
- Taxes
- Any marketing costs
There may be other costs based on the complexity and the difficulty it takes to get a product.
Once you have your essential costs, known as your overhead costs, know how much you need to break even. You will now see the profit margins for your business.
2. Set your pricing based on business strategy
What's a business strategy, you may ask?
Well, there are different kinds of ecommerce stores. The most common is ecommerce only, as in you sell products on your website and a customer orders, and you manufacture and ship the product to them.
Other types include wholesale-only ecommerce, where you sell your products to other stores, where they then sell them to their customers. It is super important to know your profit margins, so everyone gets a worthwhile profit in the transaction.
It's also possible to combine both ecommerce and wholesale to business and non-business customers.
This strategy works because the business usually has a particular part of their website for wholesale, which sells everything at a discount so the business customer can make a profit re-selling it.
An example of this is the kitchenware ecommerce store, Made in Cookware. They both offer supplies at home and to big stores.
How they're doing this is by knowing their profit margins super well!
Let's look at how they would go about wholesaling their stainless-clad frying pan.
The frying pan's ecommerce pricing is $99. While we don't know the actual profit margin, we can assume that most products aim to be around 50% or higher for a profitable wholesale price. So let's even it at 60% profit margin per sale.
60% profit of a $99 sale is $59.40.
We now know the cost of goods to make the pan is $39.60. This is good to know because wholesale pricing is typically double that price to ensure you're getting at least a 50% profit margin.
So $39.60 x 2 = $79.20 is the price to sell to retailers.
So it's up to you if your product has the profit margins to do a wholesale business model.
Need help in finding your profits? We have a profit calculator just for that!
3. Set your pricing based on market value
Another common way to find your pricing is to understand and know what the competition is doing.
This all starts with competitor research.
What's that, you're wondering?
Competitor research identifies the closest businesses selling your products to the same type of customers.
While it can be daunting to see other businesses doing what you're doing and succeeding more at it, it's also helpful to know what's going well and what they aren't doing.
Once you find about 3-5 competitors, you can then look at the overall pricing of their products.
Is there anything similar within the store's products? How about the products across the stores?
Once you know the average pricing of a product, you can see if you're going to be too expensive or too cheap.
It may not be the worst idea to have a higher or lower price point than the competition. It also depends on how you want to position your brand in the competition that can justify the pricing.
This leads to another pricing strategy - brand value!
4. Set your pricing based on your brand value
A brand defines how a product or company is perceived by those who experience it.
While you are selling products for your store, you're also selling an experience from visiting your store to receiving the product from the mail.
This experience you're selling is why you can justify your pricing regardless of what the competition is doing. People will be willing to pay more if it's justifiable.
Also important to note is who are you selling to?
The answer can not be 'everyone' because it's too broad, and you'll please nobody.
Your marketing and pricing strategy will be more focused once you've identified who you're selling to, whether suburban moms, lawyers, teenagers, or whoever would best use your products.
There are generally three different pricing points that help target people's affordability.
They are:
- Affordable. Not to be confused with being cheap, affordability makes purchasing easier for those who have tight budgets or can buy more passively.
- Luxurious. A high-quality product that will require a high price to justify it. Reserved for only those who can afford it and want to feel good.
- Midrange. The in-between is affordable and luxurious. Not the highest quality, but not the cheapest. It's generally a safe go-to if you're struggling to find your brand position, but it's also the most competitive strategy.
Some of the most luxurious products include a belt from the luxury brand Prada.
You're probably thinking, why would anyone buy something so expensive when the more affordable do the same?
While it's a quality belt that generally wouldn't be worth $495, they have positioned their brand to where this pricing is standard and to be expected.
You're also not just getting a $495 belt but a social identity that makes you feel like the upper class. It's based on the pride emotion, which helps people desire something they can't afford.
5. The anchor pricing strategy
The anchor pricing strategy works well in the ecommerce model with multiple products and variants.
Apple, with the pricing of their iPads, is a great example where they can price $329
How it works is with the previous strategy, you're able to find pricing for the most affordable product you have, and then you scale upwards based on the variant's value.
sIt's an elegant way of making prices out of awkward variants. It's also a psychological strategy as people like even numbers that scale logically.
For example, let's say you're setting the prices of these different sizes based on your overhead costs:
- S / $25
- M / $33
- L / $45
- XL / $71
The XL pricing is an awkward jump from the rest and probably won't be worth the value for what the customer would be getting.
So how do you make the pricing attractive while still being profitable?
By the anchoring pricing strategy!
Using your brand position on whether you're luxurious or affordable can scale based on the XL price or S price, respectively.
For simplicity, let's go with the safe midrange price, where we scale all the costs to an equal amount. So they'll now look like this:
- S / $25 -> $30
- M / $33 -> $40
- L / $45 -> $50
- XL / $71 -> $60
The pricing looks a lot more even than whole numbers, but they're also consistent price jumps from each size.
You'll notice that you might be losing money on every XL purchase. So there are three decisions you can make here:
- Accept you'll be taking a loss for every XL purchase but be making more with the other sizes. This pricing works best if you're a midrange brand.
- Remove the XL size and optionally adjust the pricing. This pricing works best if you're an affordable brand.
- Scale up the XL and make the different sizes higher. This pricing works best if you're a luxurious brand.
Also, when in doubt, the following pricing strategy is one of the safest.
6. Using the standard pricing formula
The last strategy is one of the easiest to implement because it's not about knowing the competition or your overhead costs (even though it's highly recommended, you still do).
Instead, simple math formula to plug in numbers to give you a number you can work with and adjust if necessary.
The pricing formula is your Price = (Labor + Materials) x 2
Now, for example, you're selling lamps in different sizes.
Your price will combine the labor and material of the lamps, then multiply by around two.
Say the labor of sourcing and fulfilling the lamp is about $7.
The materials are often your supplier's cost, so it's $16.
We then combine $7+$16 = $23.
With $23, we multiply it by two to get $46.
Now you could just run with the $46 price point, but you may want to look at the competition and get feedback from your ideal customer to know if the price aligns with their value.
Conclusion
So there we have the six different ways to find the pricing of your product!
It can be only confusing and overwhelming if you don't know where to start, especially with different variants of a product.
With one step at a time and knowing where you want to set, you can find a sweet spot and not fear the competition to create a fun experience for your customers and profit.
For further information on some of these strategies and others that weren't covered, here's the Pricing Strategy: The Definitive Guide 2024 to read!
And if you're wondering how people are starting ecommerce stores without holding any inventory, check out this guide here!
It's time to get to it, and I hope you have a wonderful day!
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