Pricing is a critical component of marketing. Before you start envying the volume of sales of another online store, you have to remember, large quantity doesn’t translate into large profits. It could be that someone is working really hard to make very little money.
The biggest mistake most indie online shops make is not truly taking into account the value of their labor. So before you set the price for your products, you have to understand your labor cost and what you want to pay yourself in terms of an hourly wage.
Let’s say that you are a one-person operation and you are making iPhone covers. You decide you want to undercut everyone else in the market and charge $15 each.
Labor – If it takes you 20 minutes to produce one iPhone cover, that means you can make 3 in an hour. If you are selling each for $15, then you are essentially paying yourself $45 an hour. So that’s about $79,000 a year based on a 35 hour work week, and a 50 week year. But wait. That is not your true hourly wage.
Materials – Now you have to deduct your materials. Let’s say that a plain case is wholesale $1.80 each including tax. Then there is the printing charge, let’s say .40 each. You have to get it to the person, so even if you charge for shipping, you still have packaging costs, let’s say .30 each. So the grand total for 3 iPhone cases is $7.50. These are fixed costs. In other words, no matter what price you charge, these costs stay the same.
Selling Fees – If you are selling on an online marketplace like Etsy, you now have to deduct your fees ($.73) and PayPal fees ($.44). So for the three iPhone cases that would be $3.51 total. These costs are variable, so they go down when your price goes down, and up when your price goes up.
Ok, so now your hourly wage is down to $34 per hour, which is $59,500 per year in theory, if you sell 24 iPhone cases a day, 5 days a week, 50 weeks a year.
Other Expenses – But what about other business expenses? Gas to drive to the printing store and the post office, bank fees, business taxes, Internet use, advertising costs. You have to factor all of these costs in as well.
Now, obviously you do have to stay in line with your competition, so you can’t charge twice what they are for the exact same product, same materials, same delivery and so forth.
So, before you set your prices, start with your desired hourly wage and work from there. If you cannot come up with a pricing model that is also a viable business model, then it is not worth doing.
SMALL BUSINESS HELP – If you don’t know how to market your online business and are not making sales, ask me a question at email@example.com or use the contact form below as well as check out my Small Business Consulting Services and my Ebook Shop.
© 2013 G.B. Oliver. All rights reserved.