There are a multitude of factors that affect profitability and a merchant’s bottom line. Setting the right price for your products is an important step toward achieving that profit. Out of the profit margin comes the cash to cover expenses and the income for you, the owner. In a competitive industry like ecommerce, however, pricing can be a surprisingly troublesome beast.
Of course, you can’t start marking up your products without paying attention to how the market works – because if you price too high, you will scare potential buyers away, whereas if you price too low, you might end up making an impression that your items are poor quality.
Why Price Matters?
In addition to the statement above, there are others reasons to justify why your product pricing strategy is crucial. It’s easy to summarize them: pricing is one of the key factors that affect the buying decision of online shoppers.
And here are the stats to back up this claim: according to PWC research the following are the main reasons why consumers went to an ecommerce site:
What are the key takeaways from these findings? Firstly, customers look for good pricing, and when they see that one online store is offering deals and coupons, they visit it.
Secondly, when a promotion doesn’t result in a website visit, it is quite likely that consumers are comparing prices. 86 percent of first time shoppers think it’s important to be able to see and compare prices from different sellers. Hence, getting pricing right can give your online store a profitable and competitive edge.
Understanding Markup & Margin
Setting product prices is like a form of arcane art. How the heck are you supposed to determine the right price when no one is giving you real numbers?
Well, if you have a system in place to figure out your purchase price or cost of goods, you can use it to determine your ideal price.
That’s where the concept of markup comes in.
Depending on where you look, you will get different answers for what markup stands for and how does it relate to margin (aka gross profit margin). To keep things simple, I’ve provided an easy explanation of markup and margin below:
You can refer to markup as the extra percentage that you charge your customers on top of your product’s cost. Here’s how it is calculated:
Markup = Price – Cost ÷ Cost
Let’s say you’re a clothing retailer and the cost of one pair of jeans is set at $15. That $15 is how much it costs you to buy a pair. You can then list it on your website and sell each pair for the price of $30.
If we calculate the markup using the above formula, we arrive at 100%:
30 – 15÷ 15 = 1.00 or 100% markup
Expressing markup in percentage terms is beneficial because it guarantees a proportional amount of revenue for each product you sell, even as your cost increases or fluctuates. This means the markups you use at the beginning should scale well as your company grows.
Margin refers to the profit that you earn on an item as a percentage of the selling price. It is often expressed as a certain amount in currency, or a percentage like markup, but uses price as a divisor. If you want to calculate the margin of a pair of jeans that you bought for $15 and sold for $30, here is the formula you’ll use:
Margin = Price – Cost ÷ Price
30 – 15 ÷ 30 = 0.5 or 50% margin
You could say the margin on a pair of jeans is 50% or $15 in currency terms.
I recommend using markup to price your products as it helps ensure that a proportional revenue is generated on each sale. It’s also a good measure for those new to ecommerce because, as you get things set up, you are aware of the costs for your sourced items, and you’re still learning about the amount of revenue you can generate through sales.
Later, as you get to know how your business is performing and you start to analyze sales, margin can be quite helpful for determining how much actual profit your company is making on each item sold.
Adding The Right Markup to Your Products
Most merchants benchmark their markup decisions using keystone pricing, which is basically doubling the cost of an item to get a 50% markup. However, in many cases you’ll want to markup your products higher or lower depending on your company’s situation.
Here’s a formula you can use to determine your retail selling price:
Retail price = [(cost of product ÷ 100 – markup percentage)] * 100
So for instance, assume you wanted to price an item that costs you $15 at a 35% markup instead of the standard 50%, here’s how you’d find your retail price.
Retail price = [(15) ÷ (100 – 35)] * 100
Retail price = [(15) ÷ (65)] * 100 = $23
MSRP or Manufacturer’s Suggested Retail Price
This is a no-brainer pricing strategy. The manufacturer of your product defines the MSRP, and that’s how you price your item. The reason this was first done by manufacturers was to help standardize prices of items across multiple retailers and locations.
For instance, a manufacturer could suggest a $4.60 MSRP for a product that costs $3.00, a markup of 35%.
The upside of this pricing strategy is that the markup is already determined. The downside is that you’ll have prices similar to your competitors. Therefore, you’ll have to differentiate your online store in other ways, such as by offering free returns and express shipping.
Now that you know how to markup your items, let’s take a look at some pricing strategies you can deploy to stay afloat and a step ahead of your competitors.
Another thing to be aware of is that some suppliers will force adherence by refusing to fulfill stock orders for merchants selling below their MSRP. This is something to be careful of when dealing with suppliers, especially if you plan on offering discounts on any of your products.
It’s no secret that buyers love rebates, seasonable discounts, sales among other markdowns, and that’s exactly what discount price refers to. There are several instances where you might consider taking this path. The more understandable ones being:
Discount pricing can be a blessing in disguise for selling old or out-of-season inventory, but using it too often could give you a reputation of being a “bargain store” and stop consumers from buying your items at regular prices. On that account, discount pricing should be exercised with caution.
To set a market-oriented price and an appropriate markup, you need to know how to compare prices against competitors. We recommend using a price tracking tool as it will give you all the data about your competitors’ assortment and prices, without needing to spy on their product pages.
It’s always smart to understand what your competitors have to offer, and with such tools you’ll know whether you are pricing your products among the cheapest online shops or among the expensive. After researching your competitors’ prices, you will have a bigger and better picture, which makes it convenient to determine your own pricing.
For instance, you can make an assessment based on competitors’ prices and in turn offer a higher or lower price, or stick to what others are offering. If you’re a brand new ecommerce store, you might want to consider penetration pricing, where retailers use low prices in comparison to established companies, as an attraction in order to enter a new market. Once they have gained market share, they slowly start increasing the price.
Modalyst Makes It a Breeze to Add a Markup to Your Items
When setting pricing rules, Modalyst users can automatically adjust the price of all their products by applying either an “Added Markup” or a “Multiplied Markup.”
Note: These changes apply only to items added after the rules are implemented by you. Products added before this rule is applied won’t be adjusted to these rules automatically. To adjust already added items, please see instructions here.
The Added Markup will add a “fixed dollar” amount to the product price whereas a Multiplied Markup will “multiply a fixed number” by the product price.
The above markup rules can be applied to items found via Wish.com extension and the Modalyst Marketplace.
Here’s a visual of the Wish.com pricing rules. Note the variance between “Product Price” and “Product Compare at Price.”
While the pricing rules work in the same way for Wish.com and items sourced via Modalyst Marketplace, there is one slight difference in the pre-set markup values between the two sections.
For Modalyst Marketplace, the suggested price increase for both Product Price and Product Compare at Price is 1.67. This multiplier is intentionally selected to align with the Suggested Retail Provide given by independent suppliers on Modalyst.
The Suggested Retail Price is aligned with the pricing they use to sell their items. That said, you are free to adjust it to achieve the margins your business is looking for. For wish.com products, there is an opportunity for higher margins since the products are so inexpensive. A pair of socks for $1 could easily be sold for $7 as an example. For Modalyst marketplace products, there may be slimmer margins since items are a bit more expensive.
At the end of the day, pricing is a decision that is impacted by a lot of factors. The goals of your business, competitors’ prices and your position in the market are the top areas to think about. Also, there’s never a black and white approach to ecommerce pricing, it’s always changing, and the above are just a few options to consider when determining what will work for your online store.