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Pricing plays a huge part in being a key driver of your overall profitability and how your company is perceived in the marketplace. Choosing a price based on profitability and customer affordability is a fine line, luckily, the following tips will help you determine your product price range.
It all begins with calculating how much your business spends before the product reaches the final shelf. If you’re a retailer or a manufacturer, your “cost of goods sold” include your direct costs (raw materials, freight or shipping charges, labor costs, or any other factor that contributes to the creation of a product or service) and additional costs such as supplies and overhead expenses that are needed to deliver the product to its rightful point of selling.
The most stress-reducing way to simplify cost calculation is to add up all your expenses and find the total number of dollars spent on things such as raw materials, storage costs, shipping charges, taxes, and labor costs. From here, you’ll be able to calculate your “break-even” point.
The "break-even" Point
By definition, the break-even point is the amount of sales dollars you need to generate in order to recover all your expenses and have a profit of $0.
Many e-commerce owners have a good knowledge of other costs that they need to recover from when selling a product, but they don’t always factor in the overhead costs that ultimately play a large chunk towards making a profit.
Overhead costs are sometimes referred to as “fixed costs” because these costs do not increase or decrease if the volume increases or decreases. The cost stays the same. You need to include these indirect costs to calculate your break-even point. Other examples of fixed costs (overhead costs) include expenses such as: Salaries and benefits of office staff, marketing and advertising, property and land taxes, office equipment, and insurance and professional fees. Those are some of the variables that often go overlooked when calculating expenses.
- Case study and an example of the break-even point:
123 Co. earned $150,000 in revenue by selling 15,000 units at $15 per unit. The company has a gross margin of 57% and indirect fixed costs of $34,000.
123 Co.’s break-even point is: $59,649.
Indirect fixed costs ($34,000) ÷ Gross margin (57%) = Break-even sales ($59,649)
Once the company sells $59,649, it will cover the costs of goods sold as well as indirect fixed costs. This being said, the company will not earn a profit at this level of sales since this is only the break-even point (in dollars).
Competition is key, adjust your prices
It’s important to pay close attention to what your competitors are doing and how vast the ranges in prices are in their catalog of products. For example, if you’re selling leaf-blowers for $150, but five of your popular competitors are selling them for $130 and generating more business as a result, you’ll need to re-examine and re-evaluate your markups and price ranges for your products. Staying closer to the prices of your competitors will mean that you’re ready to not only compete in the market, but present your business as offering something more than just an eye-catching price.
The e-commerce industry and business environment is always changing, adapting, and innovating, and this means your goals and margins will always be shifting. This is why it’s a good idea to annually check your costs and price ranges while keeping track of them monthly to ensure proper organization and profitability. Staying afloat in the e-commerce industry could prove to be difficult, but as you find the right price for your products by conducting market research, calculating costs, and knowing your break-even point, your profits will soon be rolling in.