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Ecommerce 101: How To Set The Right Price For Your Products

Every business will have to deal with product pricing at some point. Setting an amount that’s too high might dishearten customers, while setting a price that’s too low will make you lose money before you even get a return on your investment. Setting the right price is not just about making money. It assigns a fair value for all involved in the buying and selling of goods and services in the market economy.

Knowing the right price is vital to your operations as it affects all aspects of your business, from manufacturing to marketing. Your profit margins affect your cash flow and determines the feasibility to run your business for the long-term. How important is pricing, you ask? Well, while branding gives meaning to your company and what it offers, pricing defines your business’ value.

In this article, we explore how to price your products, the different pricing strategies you can use, and the different factors affecting pricing in ecommerce.

Do your research

A well-researched plan is essential to a successful business. To get an initial picture of how much to charge for your products, you can begin by researching your competitors. How much do they sell the same product on different marketplaces? You should also consider your target market. Based on their unique demographic, how much purchasing power do they have? How much are they willing to pay for your goods or services? Online shoppers today are willing to pay more for products that come with good customer service and social proof such as reviews and recommendations from families, friends, and influencers.

When it comes to online shopping, research suggests that among others, consumers primarily view price and product info first when choosing a business to buy from and it takes as little as 3 seconds for them to decide. (Photo by Monstera from Pexels)

Check your pricing against your business goals. How much do you need to sustain the business? What profit margin are you comfortable with? You should also review your sales and financial projections in your business plan. Are you aiming for short-term profits or long-term sustainable sales revenues? When you consider your business model, scale, type, and industry, would you consider your business a premium-priced priced “quality” brand, or does your business provide affordable and high-volume retail products? According to a study by IBM and the National Retail Federation (NRF), 81% of consumers belong to one of two types, the value-driven consumer who buys based on price and convenience and the purpose-driven consumer who buys goods and services that are aligned with their values and beliefs. Knowing what kind of business you want to run can also determine the value you can provide. Look into the technology and trends surrounding your industry, as they also influence the supply and demand of products in the market.

Create a pricing strategy

A pricing strategy is a method that determines the price of a product or service that will best suit your business. To find out which strategy works for you, first analyze your own business goals in depth. Answering questions such as, “Do you want a larger market share or improve your cash flow? Is your goal to increase your brand presence or are you introducing a new product or service?” will help determine how your company objectives affect your pricing.

Next, compute your business costs. When choosing a product’s price, first consider how much it costs to produce the product or service. Factors such as manufacturing costs, equipment expenses, startup expenses, as well as marketing materials should be considered as they are part of the fixed and variable costs of your business. Meanwhile, the cost of goods sold (COGS) is your unit price or the price to acquire or produce your product minus indirect costs such as shipping and delivery.

Quick Terms

• Price is the amount of money charged in payment for a product or service.
• Fixed costs are business costs that remain constant such as rent, salary and internet payments.
• Variable costs are costs that change in proportion and variation to the volume of goods and services produced. Examples of variable costs include raw materials, production utility costs, and shipping costs.
• The cost of goods sold (COGS) is the direct cost of producing the goods (products or services) sold.

Set your profit margin. Once you’ve determined all the costs to run your business, setting a profit margin determines how to sustain it. A healthy profit margin is between 10–30% on top of your overall costs, but this may change depending on the industry you are in and the market demand.

For a more quantitative approach, here’s the formula to compute your profit margin:

Net profit margin = revenue — cost / revenue

Let’s say your monthly revenue is ₱100,000. The overall cost to produce the goods is ₱30,000. In this case, your net profit margin would be ₱70,000.

To find your profit margin ratio use this formula:

Profit margin ratio = (net income / net sales) x 100

Given that your net income is ₱20,000 and your net sales is ₱50,000. Then your profit margin ratio from a monthly revenue of ₱100,000 is 40%.

TIP: Remember that prices aren’t fixed. You can always change your price depending on trends and market conditions as well as to compete with prices on various marketplaces.

As a business owner, knowing the basic math formulas to calculate your business’ fiscal health is essential to running a business successfully. (Photo by Karolina Grabowska from Pexels)

Applying the math on a sample monthly income statement

In our example below, an online clothing store sells three items namely, shirts, pants, and shorts. Assuming that all 250 items were sold in a month, the total sales revenue of the clothing store would be at ₱75,000. But once we subtract the variable and fixed costs, the total net income before tax comes at around ₱23,000. If we calculate the profit margin rate from the formula shared earlier, the profit margin comes to around 30.66%.

Pricing strategies for ecommerce

There are many pricing strategies that a business can use but in the examples below we focus on the strategies best suited for online sellers in the ecommerce industry.

1. Competition-based pricing. This type of pricing relies on the market rate of a company’s product or service. The cost of the goods acquired is not factored in, but instead, this strategy uses your competitors’ prices to gauge the price you can potentially add on your product. If you’re selling on various online marketplaces such as Shopee or Lazada, this pricing strategy could be right for you. Depending on the product, online marketplaces are oversaturated with the same products with some sellers even having the same supplier. If your research suggests that you can price your products lower than your competition while still making a profit, then you not only sustain the business, you also gain a larger market share in the process.

2. Cost-plus pricing. Also known as markup pricing, this strategy involves you marking up or increasing your product price depending on how much you want to profit. This is the best strategy for retailers as you can just add your profit margin on top of the manufacturing cost or the cost to acquire those goods. One example online are face mask sellers. One face mask typically costs ₱3-₱8 to acquire, and most sellers sell it at ₱9-₱15 on Shopee — that’s potentially a 300% markup on an essential item. It’s the best overall pricing strategy for online businesses that sell retail goods.

3. Bundle pricing. This is a good pricing strategy for a highly competitive or oversaturated marketplace. Sometimes competing with prices is just more difficult. To set apart from a market with the same products, you can sell multiple products in a bundle and charge it with a single price. One example you can do is bundling your lowest selling product or value-adding product with your most popular product to increase sales. You can also offer free items with your product or add a discount to joint bundles. This strategy works especially well when selling services.

You can also combine different pricing strategies to increase your conversions. For example, you can add promotional pricing, which is pricing that adds discounts and deals to a competition-based strategy. You can also experiment with value pricing and test your customer’s willingness to pay as you adjust your prices.

The products that arrive at our doorsteps have been influenced by political, economic, and social factors. (Photo by Karolina Grabowska from Pexels)

Different factors that affect pricing

As you further gain the skills and knowledge to determine the right price for your products, you should also be aware of the the various internal and external factors that may affect your pricing.

1. MSRP. If you’re in retailing or contracting or reselling goods from a manufacturer or producer, they may recommend selling the product through their list price or the Manufacturer’s Suggested Retail Price (MSRP). They are most often used in the automotive industry, but retail markets also use MSRP to keep prices at a value.
2. Psychology behind pricing. Psychology affects consumer purchasing behavior in ways that are rarely noticeable but adds up when in comes to increased sales. The best example of psychology in pricing is turning a P100 shirt to P99, with the idea being that the consumer gets more for less. Value-adding product “benefits” also induce more sales just by perception alone. Business owners can use different psychological pricing tactics to influence how their goods can be sold.
3. Price elasticity. The price elasticity of demand refers to how the supply and demand for a product or service changes when its price is altered. The demand for an elastic product may decrease when its price increases, while the demand for inelastic goods will not change as drastically when its price increases. Fluctuations depend on different factors such as product substitutes and buyer urgency.
4. Legislation and regulations. Not all businesses price their products fairly. As such many governments regulate prices to protect consumers through the introduction of Suggested Retail Prices (SRP) and consumer laws such the Consumer Act of the Philippines. Business owners should comply to the laws and are advised to avoid price gouging, predatory pricing, and other unlawful pricing practice.
5. Taxes and fees. Many business owners forget to add sales and value-added tax when pricing their products. These can also be passed on to the buyer or the transferee of the goods. Value-added tax (VAT), which ranges from 0–12%, applies to the sellers goods during the production or retailing process.

“Psychology affects consumer purchasing behavior in ways that are rarely noticeable but adds up when in comes to increased sales.”

Providing value, one product at a time

While product pricing is important, prices alone do not determine your revenue and sales. However, it factors on how tenable your business can be when it comes to providing value. At Cafe24, all ecommerce businesses are able to provide value to customers all on one platform. Online sellers can view their product, customer, and sales data on built-in analytics tools that are offered for free. Insights from these data helps you adjust your pricing over time, while our promotional tools and apps such as the Influencer Rewards app and Free Shipping Banner app help increase sales numbers and market share. Most people hesitate to start an online business when they find out about the ecommerce platform’s monthly fees and upfront costs. At Cafe24, you don’t need to worry about pricing. When you register for an account there are no upfront costs or fees. Starting up your online business is free.