Day 11: Fixing the Pricing strategy
In the last topic HERE, we explored in detail on how to get the products ready and related information. Today Am planning to fix the price point for the products I have got shipped from China.
In eCommerce, deriving the right pricing strategy is very important. A slightest difference can be the reason for a sale to happen or not.
All my life I have been selling digital goods & fixing the right price point didn't at all seem so important, because in digital goods:
- You can always give a full refund ( as there is no shipping charges involved )
- You can reduce the price however you want & even give away for FREE.
- You can be open to accept even a million orders in the next minute ( as there is no inventory, production etc. )
But, while selling a physical product, none of the above advantages is available. Everything you do has a cost & time attached to it.
As per the sales strategy we had discussed in our earlier post here, we have decided to go with the LOW MARGIN strategy. Having that in mind, here is the price I have fixed for each Mi Max case:
Procuring price for each case: $0.50 +
Logistics from China for each case: $0.50 +
Customs clearance ( differs for each country ): $0.40 +
Warehousing : $0.20 +
Technology cost : $0.20 +
Packaging cost: $0.20 +
Cost of my time spent: $0.60 +
Total: $2.6
Next lets add logistics cost for the delivery of ordered products. I have initially decided to sell it within a country. Speaking with leading courier providers like FedEx, DHL, DTDC etc. the maximum they would charge to the farthest point in the country would be $1 for each case.
Note: Since I wanted to hit the road running ASAP, I did not go about calculating the logistics cost during the checkout process etc. Moreover I figured out that even if I dynamically calculated the logistics price during checkout the difference would not be significantly different. And from sales point of view, I can say FREE SHIPPING ( as I have added the shipping cost already ). So for now Am fixing a fixed price for every order.
Adding a logistics cost of $1, Total: $3.6
Now, one important thing to consider in physical goods eCommerce is the cancellations & returns. Even before deciding to sell physical goods online, I had spoken to a lot many experienced folks who have been selling stuff online for long. Everyone says the same thing:
However quality your product is & however quickly you deliver, safely consider 30 out of 100 products ( ie. 30% ) will be returned for some reason or the other.
This is scary as if you notice in the pricing table above, the original cost of the product is just a fraction of the derived total cost. Which means that if a product is returned, there is no point in even getting the product returned as that would double my loss ( especially with my return logistics cost )
Having that in mind, the best way to cut your loses is to ADD your loss on the remaining 70% of the products. In this way, if 30% of your products is returned you dont face the loss. If by luck you dont get 30% return rate, it adds to your profit margin. So lets add the cost of 30% of return products on the remaining 70%,
Cost of each product: $3.6
Cost of 30 out of 100 products: $3.6 * 30 = $108
Divide $108 by remaining 70 product = $108 / 70 = ~ $1.5
So, lets add this $1.5 to the cost of each product,
Total = $3.6 + $1.5 = $5.1
Now, I would like to do some Advertising for the cases ( via. Google, Facebook etc. ). Doing a bit of Keyword research and bid level for related keywords ( will discuss about this part in detail in a separate post ), I decided to spend $1 on advertising for each case. Adding that to the cost,
Total = $5.1 + $1 = $6.1
Good, Now lets keep a very thin profit margin on top of this. I would consider adding 15% to 20% profit margin ie. $1
Total = $6.1 + $1 = $7.1
Note: To check if your price point is the best among competition, search for your product and see who has the lowest price. When I goto Amazon and search for Mi Max Cases, I see the lowest price is $7.99 & it goes upto $22. This gives me confidence, as any price sensitive buyer would choose me over other sellers.
One other thing I did notice among my competitors is that the price they display is excluding shipping. Which means that the price will increase during checkout. On the other hand, I will advertise my product as FREE SHIPPING( as I have included the shipping cost in my pricing already )
Now all set: Products ready, Price point ready etc. the next step is to choose a good eCommerce platform to start selling. Lets look at this in detail in the next topic :)
Check out the next topic: Choosing the best eCommerce platform to sell.
