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Aaaah…product pricing. How much should I sell my products?
Product pricing is not an easy task. If you sell it for too much, no one is going to buy. You sell it too low, you lose money and you’d throw in the towel before you even get a fair chance at succeeding.
And oh, low-cost products also mean they are of low quality. Well, at least that is what customers think.
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Pricing your products for sale is an art and a logical process. While you may busy yourself with web design and marketing and all that, a wrongly priced product can break your business.
In this book, you will learn everything you need to know to price your product, and get to that sweet spot where the price is just right.
Not too high, and not too low.
And if you products are priced right, you can expect to have higher conversion rate,
Let is get started!
Understand Your Buyers and Competitors
This is easier said than done, and you need a lot of work to understand your buyers. What this truly means is that you have to create a mascot of your target buyers.
This is most especially important if you are just starting out. If you have just built your e-commerce or dropshipping store, you really have no idea how the market is going to respond, at what price point your buyers are happy, and how much they are willing to shell out for what you are selling.
So, how exactly do you do this?
Painting a Picture of the Customer
Who is your customer? Or better yet, who is your target customer? This exercise is called customer profiling, and you must do this so you have a rough idea how much money your customer can spend.
First off, what products are you selling and how are they being used? To help you go about this, you must focus on the actual problem that your product is trying to solve.
Are you selling a drone? If you are, what kind?
There are many type of drones out there. Some are mere toys, while some are made for professional photographers. As you can see, there is a huge difference between what a $1,000 drone can do against a $25 one.
Drones that sell for $25 are those that you sell to kids. If so, you also have to target parents who want to buy this as a present. The problem that this drone is trying to solve is entertainment and relationships. And as you know, it is rare to find a customer who will spend $1,000 for a gift.
But if you are targeting professionals like photographers and videographers, then your pricing approach changes.
If you know that your target customer is a freelance photographer, you can do a research about how much these people are earning per year. According to Indeed, the average salary or earnings of a freelance photographer in the US is $688 per week. Multiply that by 53 and you get $35,776.
Armed with this knowledge, how much do you think a photographer is going to spend on a drone?
If you sell it for$1,000, it equates to roughly $84 f expense per month, which a photographer can certainly afford. What does this mean?
It means that $1,000 is a comfortable price point, and so you can sell your products at that base price without fear.
Who are your competitors and how much are they selling the same products for?
After completing your customer profile, the next step is to head on to other websites and check out how much they are selling their products. The trick here is to do a keyword research in Google.
You have to use the appropriate keywords to show you exactly the same or similar products. Open all the relevant pages on the first page of Google, and place the prices on a spreadsheet.
What you can do is to match these prices, or undercut them, but it is a rare option for you to sell your products at a higher price. You can sell yours at a higher price, provided that you have something else of value to give.
For example, you can sell your products at a higher rate if you have more credibility, or if you can offer a warranty. For an e-commerce business where you manufacture and ship your own products, this should be easy to do.
But if you are dropshipping, you must undercut your competitor or offer it at the same price. The other thing you can do is to take the average and price your product that way.
Take a look at this example. Let us say that we are going to sell a drone called 509V Quadcopter RC Drone. If I go to Google and type that keyword, I get the following results.
|Drone Aircraft Plus||$99.99|
As you can see, there were only three meaningful results, as the rest on the first page of Google turned out the same pages for the same seller.
In this case, my competitors are selling for the lowest price of $49.99, and the highest is $99.99. The ultimate question is, how much is my capital for this drone?
If my capital cost plus my e-commerce costs are lower than $49.99, then I can sell it for a price lower than Amazon. But if not, I can still play around between the average price of $74.99 or the top price, which is $99.99.
Use the Right Pricing Model
Once you now your target customers and your competitor’s prices, you now have to apply a pricing model. There are two types that we will talk about here, which are Cost-Plus Pricing Model, and the Value-Based Product Pricing Model.
As early as now, there is no magic sauce that you must apply. The choice depends on different circumstances, and you are the best person to decide which approach to use.
The Cost-Plus Product Pricing Model
In this pricing model, what you need to do is to add a percentage to the capital cost as your mark-up. The capital cost is also called a breakeven cost.
Let us take a look at a simple example below.
|Cost of drone from supplier||$49.99|
Your breakeven cost here is almost $60. The thing is, this table does not include your overhead costs, website maintenance, the fee you pay for charging payment, advertising costs, and a whole lot more.
But we will discuss that later.
For now, let us use the cost-plus pricing model. Supposing that we add 40% as our mark-up. Then we get
$59.99 X 40% = $23.99.
If we add $23.99 to $59.99, then our selling price is $83.99. This price is higher than the lowest price of $49.99, but still within the range of the highest price of $99.99.
At this price, however, you can now offer free shipping.
The other approach is to remove the shopping price from your capital, and then just charge that separately. In this case, our calculation is:
$49.99 X 40% = $19.99. Add that to $49.99 and you get $68.99.
So, where did the 40% come from?
There is not scientific answer to that. Every industry has an average mark-up price. For example, restaurants typically price their products at least 60% more than the capital because they have a lot of overhead costs.
The thing with this pricing model is that it is based in the assumption that you will sell a lot of units. The limitation here is that if you do not sell a lot, you will not cover your other costs like your website maintenance and your advertising costs.
Now, let say that you settle down for selling your product for $68.99. This time, you have to take into account your monthly expenses. See the example table below.
Your total cost is $229 to be able to run your dropshipping or e-commerce business. What this means is that for a price of 68.99 that has a gross profit of $19.99, you need to be able to sell 12 units per month to just to break even.
We arrived at that number using the formula below:
$229 / $19.99 = 11.455 units.
Now, ask yourself, is 12 products reasonable? Is it achievable?
At that rate, remember that we are only breaking even, and we are not yet making any profit. If 12 units is not achievable, you can do two things.
The first one is to reduce your expenses, and the second one is to increase your mark-up percentage.
The Value-Based Product Pricing Model
The second type of pricing is called value-based, which means that you price your products not according to a percentage, but based on a perceived value.
What does this mean?
If you think about it, how come iPhones are much more expensive than Android?
The reason is value.
While both operating systems and phones can pretty much do what the other brand can, iPhone was marketed as an elite kind of phone, and this is why Apple can command a price the way it wants
Customers have different perception about a product. The value of what you sell is affected by several factors as far as perceived value is concerned.
These factors are:
- Availability – is your product available all the time or is it a limited edition
- Exclusivity – is the product exclusive to your store or can customers buy it anywhere?
- Quality – is your product made with fine-grade materials and are they built to last?
- Performance – does the product perform at optimum levels; can they go head to head with other expensive brands?
- Novelty – is your product a trend? Is it innovative and is it new?
As you can see, the value you put on you product depends on these factors, which you can highlight in your product pages to justify the cost.
In the first pricing model, you may be able to price your product at a 60% profit margin, giving you room to break even and even become profitable. But if your product has value, then you can bump up the price to 80% or even 100% the product cost!
The best example of a product where you can use this pricing model is customized items. There are many dropship suppliers today that allow you to customize the products. Most of these are t-shirts and coffee mugs where you upload your own design, and the supplier will print it on the product.
These dropship suppliers are called print on demand or POD services. Since the products are customized, they have more value than generic ones, and you can bump up the price.
For example, you can buy a t-shirt from POD suppliers for $6 each, which includes the printing service. At that price, you can sell the shirt for at least $20, especially so if your ideas revolve around hot topics like politics.
Understand Your Breakeven Point
Earlier, we touched in the subject of a breakeven point. Basically, it is the amount of money you have to raise from your gross profits to pay all your expenses.
On some cases, it is the number of units you have to sell in a month to be able to pay our business bills. A breakeven point is not the point where you make profit.
It is the point where you are not in the negative or the red zone. In short, it is a pint where, after paying all your bills, your business made $0. You owe nothing, but you made nothing.
Every quarter, you have to re-calculate your breakeven point. The reason behind this is that every quarter, you may introduce something new to your business, like a new marketing campaign, or new costs such as hiring a blogger to write content for you.
As you expenses rise, you must adjust your product prices accordingly.
Why should you even bother?
This is important because if you do not know your breakeven point, then there is no way you can make an intelligent decision how to price your products. Remember, a business decision must always be based in data.
How to calculate the breakeven point
Now, it is time to whip your math skills as we need to do some calculation.
Here is the formula:
Profit = P(X) – VC(X) – TFC
And here is the legend:
- P = selling price
- X = number of units sold
- VC = variable costs
- TFC = total fixed cost
Before we do the math, let us describe each component.
- P = this refers to the price that a customer has to pay, including the shipping.
- X = this s the number of units you sold in a month, which is already paid. Do not include units where you issued a refund.
- TFC = fixed costs are those that do not change. Examples of these are rent, your website cost, utilities, wages you pay, and others.
- VC = variable costs are those expenses that can change, like marketing, shipping, taxes, fees, and more.
Now, let us do the math in a theoretical scenario.
Profit = P(X) – VC(X) – TFC
Our P is the selling price, which is $83.98. We arrived at this number because the price is $59.99 (including shipping)
40% of that is $23.99, so we add $59.99 and $23.99, and we get
Our VC or variable cost is shown below:
- Advertising – $100
- Miscellaneous – $100
- Total = $200
Our Total Fixed Cost or TFC is shown below:
- $59.99 X 100 units = $5,999
- Website cost = $29
- Total = $6,028
Here is the summary:
Profit = P(X) – VC(X) – TFC
- P = $83.98
- X = 100
- VC = $200
- TFC = $6,028
- Profit = $83.98 (100) – $200(100) – $6,028
- Profit = $8,398– $2,000 – $6,028
- Profit = $8,398– $2,000 – $6,028 = $370
In this case, we made $370 for that month if we sold 100 units at a 40% profit margin. We would make more if we did not spend on advertising, or if we can control our miscellaneous expenses.
Now, what of we sold 200 units? Does that mean we made $370 x 2 = $740?
Let us see. If we sold 200 units, our TFC would change.
Profit = P(X) – VC(X) – TFC
- P = $83.98
- X = 100
- VC = $200
- TFC = $12,027
- Profit = $83.98 (200) – $200(200) – $12,027
- Profit = $16,796 – $4,000 – $12,027
- Profit = $16,796– $4,000 – $12,027 = $769
Well, we are slightly higher in profit tan simply multiplying the net profit earlier by 2.
Now, this is just a simple example. We have not yet included other things like your own salary, your data or internet cost, your electricity, and so much more.
What if you are not profitable?
If you have done this calculation and the result is negative, then you are not even at your breakeven point. You are losing money, and you need to do something.
As mentioned earlier, you can either bump up the selling price, or you can reduce your variable costs.
Now, what if you cannot bump up your price, and you also cannot reduce your variable costs? In that case, you have to consider selling another type of product.
Final Steps on Pricing
This is the last chapter in this course, and I will provide you with some key pointers to help you out.
Always know what is happening
Just because your priced tour product right and you are making a sale does not mean the price should stay there. Every month, you should do the same exercise that we did earlier for competitor analysis.
Over time, your price must evolve. Always leave room for enough profit so you can launch a sale or issue discounts. You also need to know that your overhead costs such as salary, taxes, rent, utilities, may fluctuate and increase from time to time, so you need to take this into account in your pricing methods.
Calculate your profit margin before launching
In the exercise we did, are you happy with a net profit of $370? If not, you have to increase your selling price or sell more items. Another option is to look for different supplier who offers it at a lower cost, or try to save in the cost of shipping.
Do not skip this process. It is tedious to calculate your variable and fixed costs, but these are necessary. You cannot run a decent business if you do not know where your money goes.
What is the formula for a profit margin? The profit margin is equal to:
(Selling Price – Cost of Product) / Selling Price
The profit margin is expressed as a percentage. It is from this profit margin where your business will pay for itself.
Do not be afraid to experiment
Always be on top of the trends in your industry, and do not be afraid to test new things. As an entrepreneur, you have to get the pulse of the market. Test how the market would react to increasing your price or lowering it.
Send emails and surveys to your customers and get their feedback. Get the series of marketers to do an analytical study about your niche. Buy reports if you have to. Use data to your advantage.
Hiking up your product price is alright, but do not do it overnight. It would help if you increase your product price in small increments. This is why it is very important that you do this right the first time. You would be on a bad spot if you suddenly jacked up your price.
Product pricing is a skill that every entrepreneur must understand. It is a tough job, but it is crucial for your success. Many people do this the wrong way. As such, they end up managing a business where they still live from pay check to paycheck, never growing and never expanding.
Because they priced their products the wrong way.
But you will not do that. You will not be like them. Apply what you have learned and make informed business decisions. If the product is not right, then choose another one, until you find that golden ticket to your financial freedom.
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