Tag Archives: pricing

It’s Not All About Price

I recently had a discussion with another redditor about pricing.  Specifically, someone asked what kind of margins other e-commerce owners had and what their markup should be. Instead of answering, the redditor posted that they should stop focusing on price as a number and the only way to compete and as a reflection of their brand.

I don’t disagree with that – it’s actually a decent way of looking at it.  However, it’s also worthwhile understanding that when you develop your business model, it’s not just about deciding on where you want to position yourself (and thus the price) but also the underlying business industry you are working in.

It’s even more important to understand this and your business resources when developing your business.

Let’s give an example – you sell Widget A. If you and your competitors are all selling Widget A, then you cannot afford to price yourself too far off from your online competitors. If they sell it for $10, it’s really, really difficult for you to sell it for $50 or $30. You might be able to pull off $20. Part of how much you can afford to price yourself away from them is based off how knowledgeable / fractured your market is. For example, if a significant portion of your market reads 2 magazines, and your competitors all advertise there, you can’t be too far off. If, however, your market is extremely fractured, then you can afford to price yourself at a higher rate.

Developing a brand will allow you to price at the $20 range and get customers – the number of customers really depends on the demand curve.  How brand (in)sensitive are your customers? How brand loyal?  If you sell sugar – the answer is almost negligible.   If you sell high end clothing, the answer is extremely high.

In addition, you need to take into account the various services and your resources – a high price generally requires a high level of service.  That level of service generally dictates a higher cost in time and money.  If you are a one man show with very little money, you might not be able to handle a lot of business – so your markup better be really, really good.  Again, at the higher ends it’s viable at the few hundred dollars and more range. If your product is only selling at $30 but that’s a 300% markup, things might get tricky.

In addition, there’s also the question on time.  Getting a $50 customer will likely take longer than getting the $10 customer.  In e-commerce terms, it might be the difference between a 1% conversion rate and a 0.01% conversion rate.   When traffic is hard to get, that 0.01% conversion rate might be a killer.

Pricing and margins

One of the many things I’ve noticed about having worked with E-commerce businesses is that it’s important to understand the effects of pricing on margins.

Pricing is a complicated business that switches from a strategic to tactical decisions on a regular basis. Price too high in relation to your competition and you could price yourself out of the market. Price too low and you could drive yourself out of business as you struggle to make up your profits on volume.

At the same time, deciding to run loss-leaders and sales is a very tactical decision that can have long-term strategic effects. If you have a large sale every month, you can drive your customers to ‘buy the sale’. At the same time, not selling your excess inventory can cause cash-flow problems.

Learning how to balance this often requires both experience in the industry as well as an understanding of your overall strategy. Sometimes all that you need is an understanding ear.