Lesson 6: Ecommerce Training – How to Decide the Selling Price?
We all sell to make some profit and this is the very basic rule of business. Setting the prices right is the key step to achieve this goal. You need to keep in mind that both under-pricing and over-pricing can lead to losses. Under-pricing reduces your profit percentage and you end paying from your pocket, while over-pricing can drastically bring down the purchases made (resulting in an overall loss).
So, how to set the right price? The first step is to clearly know how much the product in question would cost you (to buy as well as ship) and the profit margin you are looking for.
Several overhead costs need to be included while arriving at the total cost of a product. These include costs related to:
- buying (or production cost in case you are the manufacturer)
- getting the product to your warehouse (where you would be stocking and packing the products)
- rentals and salaries paid
- packing and labelling
- logistics (for shipping the product to the buyer)
- miscellaneous aspects
An example has been provided below.
|Type of Cost||Cost (INR)|
|Transportation to warehouse||2|
|Rentals and salaries||1|
|Packing and labelling||20|
|Total Product Cost (TPC)||104|
According to the example, you can note that while the actual buying cost was Rs 50/- you would be spending another Rs 54/- as overhead costs. Hence, knowing the correct product cost is highly important.
While it may seem a lucrative business, most of the retailers sell their products at a margin of 20-40%. However, this may vary with the type of product, quality of the product, local availability and a few other aspects. What you also need to keep in mind is the discount expected by wholesale buyers (anything between 10-30% depending on the volume) and that you would offer during specific periods (such as seasonal discounts). Once you have decided on your profit margin, you are ready to calculate the final price of the product.
You can use the following formula to arrive at your Target Selling Price (TSP).
Know the Sales Price Multiplier (SPM) = 100% – Profit Margin
For eg., if you are looking at a profit margin of 33%, then your SPM would be 100-33, which is 67%
Calculate the Target Selling Price (TSP) using the below formula
Target Selling Price (TSP) = (Total Product Cost/Sales Price Multiplier) X 100
Continuing from our previous example, we can calculate the TSP for our product as below.
TSP = (104/67) X 100
TSP = 155.22; rounded off to 156.
Accordingly, your profit for the example product will be Rs. 52 (156 – 104).
You can calculate the prices for all the products in a similar way and arrive at the target selling prices.
Now that you have understood the basics of pricing, we will take up the next aspect in the coming article.
Meanwhile, if you have any questions or would like me to cover a particlar topic in the upcoming lessons, then please let me know by leaving a comment.
Want to increase customer loyalty on your online store? Find out how… 5 methods to increase customer loyalty on your ecommerce store.
The author, Dr. Lirish Chinnappa, is the founder of CoorgShoppe.com, an online store that sells cool stuff from Coorg. He also moonlights as a dentist and writes for various technical papers around the world.