Part 15: Pricing Your Products
In our scramble to find a way to offer the lowest prices on the Internet, we often overlook the basic steps that we should be taking BEFORE we even offer a product for sale. We also overlook something even more important: you don’t HAVE to have the lowest price in order to make great sales. Following are some things I do before and after determining my bottom line. We sell by having products drop shipped for our sites, which works VERY well, but these steps should be covered no matter your distribution method.
Should you be selling this item now?
Snowboards don’t sell well in the summertime. You may have a hard time moving a pair of Roller Blades in January. Don’t waste your time and your site space marketing products out of season. Ask your distributor for a little historical information regarding the best time to sell their products. Believe me, to everything, there IS a season. They have the figures.
Identify your costs
Profit isn’t just the difference between wholesale and retail. You have other costs to consider. Think about every penny you spend in order to get that product to the customer’s door, and plan accordingly. For example, your merchant account probably costs you about 2.2% plus 30 cents per transaction. On an item you’ll sell for $20, that’s 74 cents. Don’t forget that calculation when pricing the item. Your distributor may charge a drop ship fee per item. Remember to factor that into your price.
This may seem very complicated, but it’s really not. Just take the figures one at a time, and you’ll arrive at a wholesale cost plus an amount that, when added together, becomes your “cost of goods sold”. For example, an item that costs you $10 at wholesale, plus a $1.50 drop ship fee, actually costs you $12.24, not $10. Why?
Product cost at wholesale: $10
Drop Ship Fee: $1.50
Merchant Account transaction fee for a $20 sale ((20x2.2%)+.30) = $0.74
Total = $12.24
At a $20 sale price, that product earns you a 39% profit (1-(12.24/20)=39).
Identifying all your costs is important if you want to price your products properly.
Check out the competition
Search on the item you plan to sell. Check out the competitors’ prices. But DON’T get caught up trying to beat the wrong competitor! You need to stay within your “venue” (the place on the Internet where you sell your products).
Our stores are visible in an Internet Mall, as you know. 90% of our traffic comes from there. When we seek out our competitors, we look for other businesses like ours ONLY in that SAME Internet Mall. Then we compare.
If I’m thinking about selling a product, and I get 8,000 hits in 500 stores on that item in the Internet Mall's search engine (like the DVD players we talked about), forget it. If I get a few hundred hits in 30 to 60 stores, I’ll look into it further.
So check out the competition, narrow down your product list, make a note of the three lowest prices you find for each product, and then ask yourself another question.
Is anybody going to buy this thing?
This doesn’t have much to do with pricing, but it should be said.
When considering products, there’s unique, and then there’s too unique. Yak Cheese may sound like a great product, because nobody else has it for sale on the ‘Net. There’s a reason for that. If you sell more than 3 boxes a year, I’ll EAT some.
Unique is Rain Barrels made in Maine. It’s Exotic Cheeses imported from Italy. Silk Parisian Lingerie. Things you don’t see every day, but would be proud to give as a gift.
Then there’s “common”. Everybody and their grandmothers are selling Alabastrite Figurines on the Internet. Do they sell? Sure, in a limited fashion. Do you want to sell them? Not if you want to make any real money.
In my experience, the vast number of products that fall between those two extremes sell well. Coleman Sleeping Bags, and Conair Hair Dryers. Porter-Cable Drills, and Disney Software. BRAND NAMES sell. Look at your potential product, and ask yourself honestly if YOU or people you know would buy it on the ‘Net.
Set your price
Take the lowest price you collected on a product in your list that has survived the search above. Calculate your estimated wholesale cost, then subtract that from the lowest price. If you don’t see at LEAST 15% profit, don’t bother.
If you do, there are a couple of ways to proceed. You can undercut the lowest price in your “venue” (the Mall where your store is, or the Auction area where you sell) by a bit, and hope to “kick off” the product and get yourself noticed. Chances are, though, that the following week you’ll find that someone has undercut YOUR price by just a bit. That becomes a losing game.
One method you can use to draw customers is called the “loss leader”. These are desirable items (in your general product line) that you sell dirt cheap just to bring in customers. Then you price the rest of your products at the second or third lowest price in your venue. The customers come in for the loss leaders, and once they’re in your store, you can lead them to other products that complement or replace the loss leader. Using a toaster as a loss leader? Place a much nicer four-slice toaster right next to it, with a higher profit margin. They’re already there, they already want a toaster…wouldn’t they like to have a REALLY NICE toaster?
There are all kinds of marketing methods like that which you can use to promote your products, but the one that works best for me is this: I spend a lot of time making my site look better and easier to navigate, and pay a great deal of attention to my customers.
That makes me more reputable in the eyes of the customer. You’ll find that people don’t mind paying just a little more if they feel comfortable in your store. They don’t like to worry that they’re buying from a “hack” who may not deliver. Nothing says “hack” like a cluttered, confusing storefront and a slow response to customers' questions.
After you’ve sold an item for a month or two, revise that “cost of goods sold”. At that point, include the monthly cost of your store. Measuring past performance is just as important as setting the correct price to begin with. If sales drop, recheck your competition. If that’s not it, drop the product, or shelve it until the “season” comes back around. Don’t get sentimental about your products, and NEVER just let your store sit there in limbo once it starts to make money. This is a dynamic business; stay on top of it!
A last word (or three)
Retail pricing has many "ins and outs", on the Internet or anywhere else! It would be impossible for me to cover everything here, even if I KNEW everything. The steps above are just the basics of a process that works for me. Patience and persistence are important keys to a successful business of ANY kind, so hang in there and take it one step at a time. You CAN do it!
Time for Part 16: Shipping and Handling