If you’re new to the world of retail, you’ll quickly run into your first business-oriented obstacle. When you’ve decided on your software and web design, you’ll need to decide on which products to stock and what distributors to form relationships with.
Then, you must decide how you’ll price those products. The end goal, of course, is to make money. But how do you do that in a way that’s fair to customers while maximizing your profit?
First, understand the factors that make up your product mix.
- Length: How many items are in your product line?
- Breadth: Do you have more than one line of products?
- Depth: What kind of variety do you stock in each product line?
- Consistency: How do customers relate to your products?
Next, you should consider your pricing method. According to ecommerce experts, you should evaluate the following four options.
- Cost-plus pricing: Also known as “keystone pricing”, this method is a popular one. Simply add a markup percentage on top of the wholesale price for each prodcut, coming up with a competitive market price for individual consumers.
- Target return pricing: When you have a better idea of sales projections, you can use this method. Based on a certain number of items you expect to sell, the target return pricing method computes the price based on a projected total profit.
- Value-based pricing: This method takes into account the competition. By measuring typical market prices, you price items in an effort to undercut the competition, drawing customers in with lower prices.
- Psychological pricing: If you’re selling a name brand product, customers may perceive a higher price for the product over a generic one. Based on those perceptions, you can configure your pricing.
Once your business gets off the ground, it’s likely you’ll use a combination of each strategy above. For now, try to calculate each one of these and create a reference sheet. Make sure to keep it up-to-date so you can change your pricing structure on the fly.