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Pricing 101: Finding Your Pricing Structure

June 15, 2017 Allison Hess

1 comment

Pricing has the largest effect on your bottom line. The wrong pricing structure could mean the failure of your company, while the right price could be the ticket to attracting customers, overpowering your competition, and growing your business exponentially.

 

But the price is more than just picking a number that sounds good. There are a lot of variables that go into pricing accurately and effectively towards a successful online marketplace listing.

 

What Is The Importance Of Pricing?

 

Pricing has more influence than just profits. Not only should your prices cover the costs you have and the margins you want, but the price tag also says something about your brand. How you price your products directly correlates to how you will position yourself in the market. Your potential customers will see your price as a way to label and understand your product within the context of the industry.

 

A price tag tells your audience how you want to be perceived. In this way, it influences your financial success in more ways than just creating margins. That price says everything about the current and future development of your company.

 

Large corporations have teams of people who just study pricing patterns! It’s a science that takes into account fluctuating internal and external factors. But you don’t need to be a huge company to price correctly. You just need a precise and comprehensive pricing formula that correlates to your specific online business.

 

How Do You Accurately Price An Item?  

Pricing your products first starts with ensuring you have decent margins with positive cash flow. Simply put, your price needs to cover your overhead and cost of goods sold. How much does each product cost to make, promote, and sell? What price will cover all your costs and still be left with some money to spare per product? From there, you need to consider other external factors in the marketplace to determine how your price looks in the eyes of your customers and competitors.

 

What do you need to take into account when pricing an item?

 

1. Cost of Goods Sold

The first thing you should always consider is how much it costs to manufacture your product. How much does it cost to purchase from a supplier? What are the shipping and handling expenses? Basically, what is the cost to get the item from production to the customer’s door?

 

Generally, your price should always reflect the cost of goods sold. But this isn’t the only thing you need to consider to come up with the best price!

 

2. Cost of Business (Overhead) 

Aside from the cost per product, there are other expenses that go into a functioning company. Think of all of the costs of running your business. Consider both fixed and variable expenses. Fixed expenses are those that are the same every month: rent or property leases, debt repayments, utilities, salaries, and potential loss expenditure. Variable expenses are things that can vary each month, like inventory levels, promotional marketing, or seasonal hires.

 

One of the benefits of running an online company is that overhead is generally smaller than brick and mortar stores. However, it’s still important to account for all of your costs—especially marketing and advertising costs—when thinking of how to price your product. If you don’t take all of the costs of your business into account, you will quickly fall into negative cash flow, and your business will likely fail.

 

3. Marketplace Fees

Another important part of “overhead” for online sellers includes e-commerce marketplace fees. For example, Amazon charges Professional Sellers $39.99 per month as well as referral, shipping, and variable closing fees. Learn more about Amazon fees here to ensure you take this into account with your pricing.

 

4. Branding 

Aside from determining your margins, you also want to consider how your pricing will position you within the market. The number on the price tag is a representation of your overall brand. A high price can exude exclusivity and quality, while a low price can appeal to those looking for savings and discounts.

 

In this way, it’s important to balance your target audience with your pricing structure. Are you operating in a market where most of your customers are price-sensitive? Or are your customers looking for high-quality goods no matter the cost? Choosing the right number can give off a certain perception and brand for your company.

 

5. Competitors 

Where will your branding fit in with the overall industry? How are your competitors situated in the market? Look at the price at which your competitors are selling their similar products.

 

You don’t need to necessarily be the cheapest product. Rather, you should balance your product costs with your branding. If you and a similar company offer nearly the exact same product with the same customer service, then a lower price would help you win clients. However, if you offer a similar product but you also offer more services to your customer, then you may be able to price higher as a reflection of the quality of your package.  

 

Think of price as more than just a number. Think of it as a branding tool that pushes your business towards profit.

 

What Pricing Structure Should I Use?

 

There are several types of pricing structures that retailers will use to quickly find an appropriate price for their products.

 

The most common valuing structure is “cost plus” pricing. This adds together the cost of materials, the cost of labor, the overhead cost, and the desired profit. This is a quick and dirty way to come up with a positive cash flow price, but it does not appropriately reflect the needs of your marketplace.

 

The same is true for the markup structure. This method multiplies the cost per item (COGS and overhead) by 1.5 to get the price. Again, this ensures each product promotes positive cash flow—but it doesn’t necessarily warrant that you will sell any products within your marketplace.

 

There are also demand pricing and competitive pricing, which are based primarily on external factors. Demand pricing is solely based on the needs of the market, looking at supply vs demand as the key factor. Competitive pricing is based almost entirely on undercutting the competition’s prices. While these may give your listings a decent position within the market, they do not take into account the needs or brand of the business itself.

 

Instead, you should come up with your own pricing formula using the above five factors. This will take into account internal costs as well as external influences to come up with the ultimate price. This can ensure you have strong margins while still selling a large quantity of goods.

 

How Often Should You Review Pricing?

 

Even if you have a formula, your price should never be set in stone. You need to review and re-review your pricing frequently. A monthly or even weekly check-in can ensure you are always on the right pricing pathway.

 

Here are some things you should watch for when thinking about pricing:

Are your costs of goods changing?

 

Is your overhead changing?

 

How is the market demand shifting?

 

What are your competitors doing?

 

Who is buying your product? Is the target audience changing?

 

Are you entering a new market or going after a new customer base?

 

Are you following your sales strategy and profit objectives?

 

Are there any fluctuations in the economy (recession, inflation, policy changes)?

 

Are you introducing a new product?

 

Overall, if you want to lower your price, you need to lower your costs. If you want to raise your price, you need to align quality and service.

 

Pricing Bottom Line

 

Unfortunately, there is no hard and fast rule for pricing. You need to figure out what works best for your online business. You should continuously watch and review your price in accordance with your costs, fees, competitors, and marketplace perception. Balancing price ultimately means business success.

 

Thankfully, you don’t have to figure it out alone. HomeRev’s Managed Services simplifies and organizes pricing and related influencers. Contact us now to learn more about the implementation of your individualized pricing plan!

 

1 Response

John Hutchins
John Hutchins

June 15, 2017

Thanks for the info Jay! I have a product I want to take to market and was going to contact you. We will talk soon! Nice article.

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