Have you ever seen an item that you wanted to purchase, but it was priced too low? Of course, all of us want to get a bargain when we’re shopping, but when a £20 item is available online for 99p, most of us start to consider things like: what’s the catch? Is this too good to be true? Even worse, we start to think the words that can be deadly for a small business: ‘this must not be a very good product.’
The psychology of pricing goes far beyond a simple costs + profit formula. Pricing your items too high can drive people to your competition, but underpricing your goods can hurt consumer confidence in your brand. So how should you get started, if you’ve just started your own online boutique and you want to make as much money as possible without driving away customers?
If you’re going to make a profit, it makes sense that you’ll need to understand what your operational costs are and ensure that these are reflected in the price.
What do we mean by costs? Costs can be anything from the bubble wrap that you ship your parcels in to keep them safe, to the utilities bills that ensure you have the electricity to sculpt, print, solder, and assemble your products with care!
Here are some inevitable costs that you should never forget when pricing your items:
Merchant Account Fees
Say you need to pay a 2.2% fee and 30p per transaction every time you sell an item. For a £20 item, that’s a 74p cost towards the cost of doing ecommerce business.
Not everyone uses this, but remember that PPC or ‘Pay Per Click’ advertising can really add up! If you agree to pay 50p per click and 100 people click your advert, that’s a £50 cost. That means you’ll need to make £50 profit -- not in retail sales -- in order to break even.
Example of an Ads Performance Report produced by Adsense, the official weblog of Google's AdSense advertising service.
Web Hosting/Domain Fees
Even if these are just £10 a year, don’t forget them
Do you need this to get around, purchase materials, or get to your studio to make these items? Then it’s a cost of business and needs to be accounted for in your pricing.
This means the shirts you buy in order to screen print on, or the metals that you turn into beautiful jewellery. However, even the little things, like parcel packaging tape and string, add up! Most people forget to account for these costs, which cuts into their profit margin.
Although you may not be paying yourself a salary while your online boutique is still struggling to get established, it’s important to consider the cost of your labour. Are you making a fair wage for your efforts? If you are making custom-made dresses, find out how much the average seamstress makes in your area! £5 an hour doesn’t sound right, does it? If you are also the designer, office manager, janitor, CEO and CFO of your business -- as most small business owners are -- make sure you gauge appropriately how much your labour is worth.
Consider your overhead costs: PayPal vendor fees, and so on. Add this total up for the month and divide it by the number of items you’d like to sell.
For example, if your operational costs are £300 a month and you want to sell 2 items a day at the beginning (2 x 31 days = 62 items a month), then you need to add £4.80 onto each item to cover your expenses. Add to that £4.80 the costs of materials, if they’re not already factored in, and the price that you think your labour is worth.
Materials + Overhead + Labour = Wholesale x 2 = Retail
Materials + Overhead + Labour + Profit = Wholesale x 2 = Retail
Ultimately, the amount that you want to make as a profit is up to you -- but don’t sell yourself short! You can also try to keep track of your expenses through free apps or online account websites, such as Outright.com.
No matter what formulas you find for pricing your products, the perfect amount will always be based on your unique ecommerce boutique and business plan. Who are your customers, and what are they saying about the quality of your pieces versus price? Do they perceive your products as value for money, or luxury aspirational pieces? If you are a luxury brand, do your bespoke pieces live up to the hype? Listen to your customers’ feedback and you’ll understand how to price your items much better.
Keep Your Eye On The Competition
Keep your eye on your competition as well, as setting your prices comparatively too low will make you seem “cheap” alongside your competition. However, running marketing specials that make your items a better deal than theirs, makes your brand valuable to customers rather than “cheaper.”
It’s also integral to keep an eye on your prices, and adjust them when necessary. Stick to your business plan so that you are able to meet target revenues, but be flexible enough to adjust your pricing when the market for your products is heading in a different direction.
How unique is your product? Smart business people everywhere know that the answer to this can affect pricing far beyond the formula of “costs + profit margin,” as you can get a much higher price for goods that are seen as unique.
GFN Clothing a fashion based SupaDupa store, show a great example of setting themselves a part with their awesome, sleek, stylish branding.
If you can differentiate your goods from your competition in a meaningful way, you will be much more likely to be able to ask for a higher price. That means the more unique your product is -- or the more unique you make it seem -- the more flexibility you have in increasing your product margins. This is not applicable for every business, but if you can, convince customers that your solution is the only solution out there that meets their needs, or even offer an extra service that meets their needs that other businesses don’t offer. For example, if you’re selling bespoke clothing, offer an online ‘personal stylist’ that can tell them the best shapes for their body types. These small ways of differentiating yourself from the competition could mean big profit margins in the future.
Another factor that has more to do with pricing psychology than maths is the perceived ‘cool’ -- or ‘luxury’ -- factor of your brand. Apple computers, for example, makes smartphones just like countless other gadget companies. However, they’ve been able to differentiate themselves from the competition by ensuring that only iPhones use their operating system, and they’ve been able to market their phones as luxurious and inexplicably cool. This ‘it’ factor is one of main reasons that they are able to charge premium rates -- the highest on the mainstream market, in fact -- for smartphones that are made out of the same aluminium, wires, and glass surfaces as everyone else.
Another lesson in pricing that comes from the world of smartphones is Google’s own line of phones, dubbed the Google Nexus family. They sold phones with the same specifications as other phones, for hundreds of pounds less. That should be a recipe for global success of the Google Nexus line, if we use the logic that consumers always want the best quality at the best price. However, the line has recently been discontinued after disappointing sales, with youth flocking to Samsung’s infinitely ‘cooler’ and more well-known brand of Galaxy smartphones.
Remember people will pay more for products that are: