With everyone gearing up for back to school and labor day sales, it’s important to think about what these pricing promotions can mean for your business and how to be strategic about your pricing. Earlier this month, we launched Master of Price and talked about how you would use the new feature to run a pricing promotion. I want to take that conversation one step deeper and talk about how to price so that you are mindful of your bottom line - PROFIT.So let’s dive in. In order to price, you need to know your costs. This can be different by channel. And while a lot of people focus primarily on the cost of goods sold (COGS) from an overall business perspective, it is also important to consider the other costs associated with attracting and completing the sale.
How much does it cost to purchase/make this item?
This number should be uniform across each channel, since it is the same item. You should already be tracking this cost. In Stitch you will see this as your average unit cost field.
What does it cost to market this item?
Here is where it can really start to differ by channel. On a marketplace, the cost to market is typically the fees associated with selling on your Amazon, eBay or Etsy marketplace.
When you are running your own branded site, if you are not doing direct targeted ads for a particular item, you might think about dividing your advertising/marketing spend across your average products sold per month. This gives you a rough estimate of what you are paying per item. It also works for your retail store. This way, you can actually have an apples-to-apples comparison across your channels.
- What does it cost to deliver or service this item?
For your online channels, this includes your shipping and fulfillment costs. Again, using an average across your product sales per month can give you good estimates. Same goes for your retail store - we don’t want this to get too large of an exercise, but even just staffing/products sold can be a good estimate.
You know the cost, now set the price.
Ideally you want to always price so that you are equal to or greater than your costs. The greater the difference between price and costs the greater the profits! However, as much as pricing is a science, there is also an art to how to best apply it. The key is getting creative about how to apply pricing, and then measuring its results.
Let’s put this theory in two real-world examples:
Focus on best sellers
A great example (that I always use to make myself feel less of a cheap-skate) is the one about how the greatest markup for wine at a restaurant is typically on the second lowest-priced bottle, not the lowest. Most people don’t want to pick the cheapest, so the second bottle is one with the largest order volume.
The same logic can be applied across your site. You can play a bit more with the margins on your top sellers knowing that an extra dollar or two of profit there has more potential than spreading out pricing changes across your entire product catalog.
In business you will often hear people refer to the 80/20 rule. It can refer to a lot of things, but when thinking about your product sales it will typically mean that 80% of your revenue is driven by 20% of your products. So focus on that 20%. Stitch’s Product Drill-Down report can help find these products.
Explore lowest price tactics
Another important thing to consider is the channel dynamics when using price to drive the sale. For example, when someone is captive at your branded site or store, all their additional impulse or add-on purchases will also be at your store. This is NOT always true for marketplace. In the case of Amazon, customers will fill their basket from multiple retailers. This distinction was driven home in our recent data report about single vs multichannel sellers. The average order value is significantly higher 129% more on a shopping cart than a marketplace.
This means you can use some doorbuster strategies - pricing as low or below your cost for your shopping cart or retail location, but you should be careful when doing so on a marketplace.
When pricing low for a marketplace you want to think about the equation of whether the increase in order volume by having say the most competitive price on Amazon outweighs the decrease in margins.
The quick math is that for each decrease in margin you need the subsequent INCREASE in order volume.
Old profit/New profit
$15.00/$10.00 = 1.5
You will need 1.5x the sales. Or in our example, 150 orders. As you can see this number creeps up quickly - so do a gut check on whether you think the increase in volume will offset in profit margin (and be sure to measure after!)
And if you are going this route on Amazon - our Amazon Competitive Price Report will help you find the most competitive prices for each of your variants.
This is a lot to think about. And we will continue to cover more on pricing and promotions. But the main takeaways are to know your costs and to measure and test different prices.