How to Set the Right Retail Price for Your Products
- How to calculate the retail price?
- Pricing strategies based on discounts and promotions
- How to set the profit margins on a product?
- How much profit should you make on a product?
If you own an online store, then you know that every once in a while, there’s a need to update the inventory. However, promoting new products isn’t all about importing XLS files and descriptions. You need to take care of the quantity, calculate profit margins, define pricing strategies, and more. Since it’s a pretty complex process, you need to take it seriously. There are multiple aspects to consider when you’re looking to set the right retail price for your products. It’s recommended to cover all of them so that you get a better idea of how much profits you can expect to make per product. By the time you’re done reading this article, you’ll get a better picture of how to set the right retail prices.
How to calculate the retail price?
Product pricing isn’t just about maintaining profit margins. Nowadays, intelligent resellers use the prices to better market their products. Many online stores manipulate their prices to increase the number of visitors by consulting websites for comparing prices. This way, profits are guaranteed. According to a study conducted a few years back, pricing is the most common factor influencing shoppers to purchase products from a certain site.
Thus, you now know the role and importance of setting prices in the retail industry. In fact, there’s a whole science to it, you just need to be acquainted with the process, then put it into practice. First, let’s have a look at the latest pricing strategies, then learn more about what we can do with them.
The most standard pricing strategy, it’s defined within the industry. Markup pricing is calculating how big the profit margin percentage is when divided by the product’s retail price. You don’t need to get confused with formulas and complex math. Instead, you can use a percentage calculator to insert values in the given fields. Alternatively, if you’d like to do it manually, simply divide the markup by the retail price. Here’s an example:
- $10 / $20 = 0.5 (50%)
The $10 value is the markup price, which is set by the manufacturer/supplier. On the other hand, the $20 value means the product costs around $20 in retail stores, etc. So, this means you’ll earn 50% in profits. As great as it sounds, you still need to maintain high markups because you can “play” with the prices in terms of marketing. If the profits are set at 50% by default, you can offer discounts, promotions, pay for advertising costs, and more.
Minimum Advertised Prices (MAP)
Next, you need to know that some manufacturers and suppliers set minimum advertised pricing for each product, to all their resellers. What does it mean for you as a reseller? To promote fair sales and healthy competition, most suppliers choose to use the MAP strategy to determine the retail price of a certain product. In other words, if your supplier sets the minimum price of $100 for their latest product, no dropshipper will be able to sell them for anything less than that.
By default, most suppliers have pre-set their prices, so all dropshippers are usually notified beforehand. In case someone decides to sell for anything less than the MAP, there will be some repercussions because of breaking the ‘Terms & Conditions’ with their supplier.
Another strategy for setting the right retail price for your products is competitive pricing. The complete opposite of minimum advertised pricing, competitive pricing is clearly defined by its name. There are two types of competitive pricing strategies to consider, so it’s best for you to know both before you decide to put the price tags on products.
Premium pricing, also known as prestige pricing, is the setting of prices above your competitors’ rates. This usually occurs when you’re selling rare, high-quality products such as luxury clothing, found rarely on the Internet, where the competition is low. Also, depending on the location, you are allowed to dictate prices if you live in a developed country where the yearly household income is higher compared to developing and third-world countries.
On the other hand, adjusting the prices below the competition means you’re lowering the prices compared to the other resellers. This allows for better marketing opportunities since your prices are genuinely cheaper than your opponents. Promoting products with lower prices almost certainly brings in more profits.
Pricing strategies based on discounts and promotions
In terms of marketing, you can find multiple pricing strategies, entirely focused on discounts, special offers, and various promotions. Most online retailers use a combination of two or more strategies, to see which one works best. Based on the following ones, we’ll let you decide which strategy works best for you.
Free plus shipping
Consider this pricing strategy as a segment of the so-called psychological pricing. Namely, whenever we see the word ‘FREE’, it acts as a spark to shop impulsively. It’s a century-old trick of the trade, nowadays recognized as a ‘giveaway’, as we all know it. Giving away free products and valuable items is always popular, especially on social media. It usually results in many shares, likes, comments, and free brand awareness. Another way of selling “free” products is to increase the shipping costs, and then offer the item as free. This usually brings in small profit margins, although products are sold in higher quantities.
Product bundling (Bundled pricing)
You have surely heard about package deals. Most online resellers will take advantage of this pricing strategy when reflecting on how to set the right retail price for their products. Thus, you can often see an online store that offers several products packed into a discounted offer. For instance, you can see many online tech stores selling laptops, with additional accessories available at special discounts. Still, resellers love using this pricing strategy, because the additional purchases only add up to the profits.
In other words, the logic of this method is to make secondary sales for smaller profit margins, overall increasing the total sales. However, it may backfire if you don’t use it right. Since it’s a package and not an individual product, some customers will be hesitating whether or not to buy all products, rather than buying only the first one, as they had intended to do so in the first place.
An especially important pricing strategy for the more experienced resellers. It consists of high initial pricing, followed by a slow decrease in prices over time. If you have a business that relies heavily on returning customers, this is an ideal strategy for high profits. As all the other stores begin to sell the same products, you can start lowering the prices, to still have the most attractive offers.
You’ve certainly encountered most of these pricing methods, except it was probably from a customer’s perspective. This may sound easy to some readers, but in truth, it’s a rather complex process of experimenting and defining audiences.
How to set the profit margins on a product?
Unless your supplier requires you to set default profit margins, this process pretty much varies from one industry to another. Simply put, formulas and strategies that work great for one store won’t necessarily provide the same results for another. Each store is unique, with its own pros and cons. So, it’s up to every business owner to test and find the winning combination. Also, it’s something that is essential for a business, as well as an ongoing task.
Store owners need to evaluate and set a new retail price for their products every month or so because new products arrive all the time. Also, the competitors update the same products with fair prices as soon as they get the opportunity to do so. Thus, you’re constantly under the pressure of setting new profit margins, and you need to do it carefully. It’s best we break down this process into a few steps, using a vivid example, for you to fully understand the process.
Let’s say you and your best friend decide to make and sell handcrafted silver bracelets online.
Calculate costs and expenses
First on the list is to sit down and write all the costs. From finding materials to time spent on creating each bracelet, and shipping costs. Calculate how many bracelets you can craft on a daily basis, then set this as your main goal. With it, you’ll be able to calculate everything later on. Let’s move to the next step.
Find ways to cut costs
You can save money by finding multiple offers from suppliers, concerning the materials. The market is big, and you can always get the best prices if you spend some time researching the local suppliers. This will ultimately increase your monthly income, so pay good attention to the details. For instance, restaurant owners always aim for the best ingredients, at cheaper prices. Since you’ll be buying in bulk, make sure to ask for discounts, wherever possible.
Setting product prices
Find out how much your competitors sell the same products, in this case – bracelets. Write down the average market prices, including the cheapest, and the most expensive ones. Now, if you need $500 to buy the materials, and you’ve determined that the time spent on creating these bracelets costs around $500, that’s a total of $1000. Add the shipping costs worth $500 to the pile, and you get the total operating costs set at $1500. In this case, you’ll need to be making profits worth at least $2000 per month. After selling everything, you’ll be left with $500, and the remaining $1500 ready to cover the next month’s expenses.
Now, calculate how many bracelets you can approximately sell each month, based on how much you can create. This is the best way to know how much you will spend (and earn) in 30 days. Anytime you’d like to calculate expected profit margins, simply divide net profits by gross revenue. Once that’s done, the most important step comes in.
Evaluate, compare, and adjust profits (using past, present, and future sales)
Try to re-evaluate profit margins every once in a while. This will provide you with more realistic insights. Also, make sure to compare profits from each month. Why? Because in this industry, comparing the past to the present, usually tells a lot about the future of a business. In case some unrealistic calculations appear, it’s best to start all over and check the numbers again. Remember, a business can’t just skyrocket in sales, earning from $500 to $10000 per month. At least not unless you’ve got a spare budget to spend on advertising.
How much profit should you make on a product?
As mentioned earlier, setting profit margins depends on two major factors – location and products. You will need to take both into consideration before you set prices.
Location-based profit margins
You can practically dictate prices in countries with larger populations and higher yearly average income. The best ones to target include the U.S., Australia, Germany, the U.K., Canada, France, Scandinavia, etc.
Here, you can set higher profit margins because customers in most of the aforementioned countries aren’t that picky about prices. A higher-income means they just don’t have the time to browse the Internet for discounts. Instead, they are simply looking to buy the product, so offering discounts will reduce your profits.
Product-based profit margins
There is a general rule in the retail industry – the higher the product value, the higher the profit margins. So, if you plan on selling high-quality products (higher value), you can expect to increase the initial price of a product between 30-100%. In some cases, resellers tend to sell items and double their profits. There are millions of online customers, so it’s not yet clear yet whether this phenomenon occurs by luck, due to market size, or something else.
Depending on what kind of store you plan on opening, setting the right retail price will play a huge role in profits. Some will perfectly fit the large businesses, while others will boost the profits of beginner resellers. No matter what you choose, remember to sit down, create a strategy, calculate potential costs vs. profits, and then start searching for a dropshipping supplier for clothing.
Finally, if you start making profits using a single winning strategy, don’t change it until sales start dropping. Once they do, then start thinking about switching between markets, offering discounts and package deals, and whatever brings in more sales.
About the Author
Kristina, Head of Content at BrandsGateway. Eternal inspiration: The Doors music and lyrics, Bernardo Bertolucci's timeless “Stealing Beauty”, and the dynamic and meditative Ashtanga Yoga.