A truly optimized pricing scheme is something many retail outlets – ecommerce and otherwise – frequently fail to achieve. This doesn’t mean that these companies are failing or are about to go under, just that they’ve gone with the “cowboy” method for product pricing.
This method involves simply considering the costs of manufacture and/or inventory acquisition, ensuring unit price is enough to make a profit, and then looking around at the pricing of similar products and going with that.
Very often, this works well for companies – usually smaller ones without the resources for export cost-profit analysis – and its certainly true that similar competing products will give a good indication of how much a particular product should be sold for. However, as mentioned, this is the rough way of doing things.
Furthermore, contrary to what you might believe, proper analysis does not mean lots of complex calculations. Optimizing pricing can, in fact, be carried out by companies of any size. Nevertheless, for this slightly more complex process, there is a correct way of going about things.
Why is Pricing Complicated?
The reason that pricing can be a complicated matter is that single unit price isn’t the only thing that can be taken into account. If you order products in bulk, for example, then you probably have many inexpensive units to shift.
At this point, deals and offers come into play. The single unit price is only one figure, another figure could be the price for two or more of the same products, amounting to less than the price of each unit added up.
You might also consider your supply chain. Bulk designer sunglasses supplier Olympic Eyewear say that larger orders can reduce unit price by even more – something which could trigger a price slash.
Another reason pricing can be a complicated matter is that prices change, and you must keep up. And this isn’t just inflation. Sudden changes in anything like the cost of parts, changes in shipping, and international trade costs can all affect how much you charge for a product. In the protracted process of a product’s manufacture and shipment to you, there are many costs involved.
How to Effectively Price Your Products
So, with all of that said, it is wise to set out some tips for pricing your products a little more expertly than just seeing what everybody else is charging for similar products. Much depends on the product itself, but these tips are a solid place to start.
Calculate Variable Costs
Referred to above, variable costs are all the costs involved in inventory acquisition. These can include raw materials, overhead costs, labor costs and so on. You need to dig a bit deeper to find out what all of these are, and proper industry research goes a long way here. Nevertheless, this is a good point at which to start.
Consider Your Profit Margin
And this doesn’t only mean what your profit margin currently is, but what you want it to be. A neat calculation is to take your total variable costs, divide them by one and subtract your intended profit margin (expressed as a decimal). If you can supply a figure for each variable, you can price effectively.
Finally, Consider Fixed Costs
This isn’t the end of your cost analysis. After you’ve completed the previous two steps, you need to consider the costs that never change – regardless of how much you sell. This is the final component of your cost analysis, and it will allow you to price appropriately.
Even though this method appears pretty strict, it leaves you enough leeway for things like sales and offers. How you do that, though, is up to you.