Pricing for Profit - THE SETUP - Electronic Commerce 101

To figure out what to set your retail price at, you first have to know your cost for an item. Your vendor sells you an item for $10. But does that item really cost you $10? Sure you paid the vender $10 and received the item, but is that the total cost? The correct but complicated way to figure the true cost of an item is your purchase price, plus the cost to store that item, plus the cost of any advertising to get someone to buy the item, plus the wages of anyone you employ who had anything to do with the item, plus the cost of shipping the item, plus the cost of the website to sell that item, etc… You could spend such a long time trying to break down all of the expenses surrounding what it takes to sell an individual product that it may not be worth doing, but do keep in mind that what you charge a customer to purchase an item has to cover much more than just your price to purchase it.

One method of setting the purchase price is to pick a percentage and mark up all your products that percentage. This can work if everything you are selling is approximately the same price. If you have a large price range, a flat percentage may make more expensive items, too expensive. For a wide variety of products at different price ranges, a modified percentage based on pricing level is suggested. Set a percentage of mark up for merchandise up to a certain price, then lower that percentage for the higher priced merchandise. For example, raise your prices 50-100% for items under $10, 33% for merchandise up to $100, then for things $100-$200, mark it up 25%, etc…

Another, but not recommended method, is to use the MSRP, or Manufacturer's Suggested Retail Price. This is the price that the manufacturer suggests selling their product for. It's not usually a good idea to rely on this for your price as most other companies sell below the MSRP, and unless the product is short in supply, or very popular, chances are your potential customer will be able to find it cheaper elsewhere.

Some e-commerce stores also build their profit margin on a product into their shipping. They may sell an item that costs them $10 to buy, and sell it for $11, a mark up of only 10%. They will then charge the customer $6 to ship it when it only costs them $2 to ship, for a total profit of $5 or 50%.

When coming up with your prices, keep in mind that some manufacturers demand MAP pricing. This is a Minimum Advertised Price. Have you ever gone to an e-store to buy something and when you look for the price they tell you to add it to the shopping cart to see the price, or looked at a newspaper advertisement and see a store advertising a price that's “too low to mention”? That's MAP in action. Some manufacturers prevent their retailers from advertising a price lower than their set MAP. You can sell the product for whatever you would like to charge, but you can't advertise it below a certain price. This is being done more often to prevent stores from having a price war and driving down the value of the manufacturers product. It's also done to placate the B&M stores that feel that they're losing customers to e-commerce stores that can afford to sell products at a cheaper price than they can afford to do.

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