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How to price your products - Beginners guide
Beginner's handbook Marketing tips

Beginner’s Guide on How to Price Your Products Online

By on October 3rd, 2019 Reading Time: 7 minutes

Pricing your products can seem intimidating. And for a good reason—deciding on a product price is one of the determining factors that affects how well your online store performs among competitors as well as how much profit (and if at all) you make.

The fact that you’re here, scouting the internet for information and looking to find the right way to come up with a price for your product, is already a good sign. It means you already avoided the worst possible choice in product pricing⁠—simply guessing the price and hoping it works out.

In this blog post I’ll walk you through the process of assessing your product expenses, picking out a strategic approach, and ultimately⁠, set the final price of your product.

1. Assess your product cost

Product cost is the total value you spend to create your product. For example, if you sell print-on-demand or drop shipping products, you’re going to start product cost assessment with the price you pay for each item. However, there are other expenses involved as well.

Designing costs

Chances are, you’ll want to customize your product if possible, which leads to design costs. If you’re outsourcing design services, divide the price you pay to the designer with the number of product items you expect to sell. This is especially crucial if you plan on releasing the design on a limited volume or as a limited-time offer, since that narrows how much you can profit from that design.

If you create designs yourself, it’s tempting to ignore design costs to keep the retail price low. However, that is still valuable time spent on your product, so make sure you’re making a profit off of it. My best suggestion is to come up with a realistic hourly rate for your own work. Then add that to the product cost. This will also help you evaluate the effectiveness of the time you spend working on your business.

Warehousing and shipping costs

Two things to keep in mind. One—storage. Maybe right now your garage or living room suffices, but what happens later? Your customer demand might outgrow your living space and your capacity to pack and ship orders on time. Keep an eye on your product demand and warehousing prices that might eventually be necessary. 

Second cost—shipping. Divide the supply shipping costs with the number of items in your order and add that to the product cost. For example, you pay $20 for shipping 50 t-shirts. You then divide 20 by 50 and get 0,4. Your shipping cost per product is 40 cents.

Pro tip: Using print-on-demand services could help you avoid shipping and storage costs.

Speaking of shipping, you need to consider what kind of shipping rates to offer to your customers. Free shipping for all orders will boost your sales. In fact, customers are 4 to 5 times more likely to buy something if you offer them free shipping, but that means higher product costs since you have to cover the shipping yourself.

2. Choose a product pricing strategy

Once you know how much money goes into making your product, time to come up with a game plan. Here are some of the most effective product pricing strategies that are easy to manage in the long term.

Cost-plus pricing

Cost-plus pricing is possibly the simplest strategy out there. The formula is: Product costs + profit margin = your retail price

You take the average product cost and add your desired profit margin. The result is the price tag that you should attach to the product. You need to be careful with choosing a profit margin. If your profit margin is too low, you might end up making too little for your business to be sustainable, which is especially important if you’re looking to make your online store your main source of income.

When choosing this strategy, Printful’s profit calculator might come in handy.

Cost-Plus-pricing-strategy-example

Cost-plus pricing strategy example using Printful profit calculator

Market or competition-oriented pricing

To do market or competition-oriented pricing you have to start off by comparing your products with similar items on the market and see what the average price is. It’ll give you an overall idea of the potential price range. There are 3 main tactics that you can choose from.

  • Pricing above the market average—one way to outrun your competition is by adding more value to the shopping experience. You can do this by adding free gifts or personalized messages to each order, or go for a higher quality visual presentation (professional photos, store design).
  • Pricing the same as the market—this is a safer bet if you want to cover a large target audience and still make some profit. This will put you in the same price league as your competitors and you’ll be able to attract the same customer audience they do.
  • Pricing below the market average—this way you can undermine your competitors with more appealing prices, possibly steal some of their customers.

Be careful—if you severely underprice a product, it can generate insufficient profit and seem sketchy. Des Traynor, author at Intercom.com, put it perfectly in their book Intercom on Starting Up:

“Low pricing rules out lots of potential customers for your product, in the same way serving $3 steaks in a restaurant actually restricts your clientele.”

Des Traynor, Intercom.com

You can see the market-oriented pricing strategy in action with a lot of drop shipping stores that sell the same products but at vastly different price points. Take Zaful. They’re a drop shipping store supplied by AliDropship that sells a lot of the same trendy fashion items you can find on the Aliexpress marketplace but for a higher price. Zaful drives sales by showcasing their items with better photos, loyalty programs, influencer marketing, and store design. They show that going the extra mile with properly marketing their product can potentially bring in larger profits.

Aliexpress-vs-Zaful-competitor-oriented-pricing-example
Aliexpress marketplace vs. Zaful

They also combine market-oriented strategy with anchor pricing, which I’ll talk about next!

Anchor pricing

Chances are you’ve already seen it in action—a brand sets up an imaginary anchor price only to immediately announce a lower discount price. The discount seems appealing so it’s more likely to boost sales from people scouting the internet for bargain deals.

Possibly the best example of a well-thought-out anchor pricing strategy is by Apple. In the video below you can see Steve Jobs explaining the iPad pricing process. He mentions that the appropriate price for a product like this should be $999. After this he announces the price will actually be $499 and the previous price of $999 shatters.

Demand or dynamic pricing

Demand or dynamic pricing requires you to be constantly in the loop with recent market trends and customer desires. Here product prices depend on demand and seasonality, which means you need to change prices frequently. You’ve probably noticed this strategy with airline companies—plane ticket prices can change within days, even hours.

This strategy can be seen on Amazon Marketplace. Using the nifty price tracker by camelcamelcamel.com you can track how various product prices change over time.

demand-dynamic-pricing-strategy-example

Example of Schwinn bike price fluctuations over time
Source: Camelcamelcamel

Pro tip: Use camelcamelcamel.com tool to track prices of products similar to yours. That way you can predict your own potential product demand hikes and drops.

Discount pricing

Discount pricing is similar to anchor pricing. The only difference is that the starting price actually exists. You set up a starting price that is higher than the average market price and then frequently host sales, drawing in bargain shoppers. With this strategy, you’ll receive most of your sales in bursts.

Discount pricing is similar to anchor pricing. The only difference is that the starting price actually exists. You set up a starting price that is higher than the average market price and then frequently host sales, drawing in bargain shoppers. With this strategy, you’ll receive most of your sales in bursts.

discount-pricing-strategy-example

Asos discount pricing example
Source: Asos

Even if you don’t plan on hosting regular sales, remember popular ecommerce events like Black Friday & Cyber Monday—your customers will expect to see deals on your site on these days. So, while choosing a price for your product, leave some room for future discounts.

Skimming pricing

The skimming pricing strategy is when you enter the market with a high price and then slowly lower it over time. This way brands try to make the most out of the market by gaining profits before the product starts losing its demand. This is a popular strategy among stores selling electronics. As the product model ages and new models are released, the demand for the old one decreases.

skimming-pricing-strategy-example

Example of Samsung TV price decreasing over time.
Source: Camelcamelcamel

This is a risky strategy for new brands, especially if your product already has well-established competition. It would, however, work well for those who are selling a unique product with little to no competition—if you’re looking to sell the newest tech invention and planning to release updated versions of it in the future, you should consider giving this strategy a go.

Penetration pricing

This is basically inverted skimming pricing, meaning that you enter the market with a below-the-average price to attract a large customer base and then gradually raise your price as you grow the number of loyal customers. This is a beginner-friendly option, as long as your starting price has a profit margin that doesn’t go below $0.

You’ll see this strategy in action quite often with startup companies that grow into market leaders, especially those who offer a subscription type of service. Take Netflix for example:

penetration-pricing-strategy-example
Netflix penetration pricing strategy example
Source Statista

3. Review your prices regularly

After such a thorough process of figuring out your product pricing and picking the best strategy, it’s tempting to sit back comfortably and not come back to your prices again. I’m here to ruin your party by saying that this process will never be entirely finished.

Demand for your products might rise or decrease, some additional product costs may come along and your retail product price should change as a result.

Review your prices on a regular basis. Check your product’s seasonality, stay in the loop with ongoing trends that might involve your product, and keep up with your supplier pricing. And frequently check up on competitors because they are surely going to observe you.

Get to pricing

Now that you’ve got the tools to figure out how to price your products for retail, it’s time to get to work:

  • Assess your product costs carefully;
  • Pick a strategy from the list above that you’d feel most comfortable managing and that matches your products and business vision.
  • Come back to your product pricing strategy on a regular basis—go over your product costs and see if there have been some changes.

We’ve also made a print-on-demand product pricing video guide. Check it out:

What’s your experience with product pricing so far—have you been using any of the above-listed strategies? What’s your most important takeaway from that experience?

Una believes that any day where you get to read a book, eat chocolate, or meet a dog is a day well spent.

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  1. Alex

    I would always test multiple pricing strategies. The pricing usually goes hand in hand with your value proposition and if you get that right you will always end up with a bigger profit.

    1. Una Bērziņa Post author

      Thanks Alex for your comment! I completely agree – pricing strategies work most effectively when combined. And yes, it should be adjusted according to each individual brand and project.

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