Cost based pricing is one of the easiest ways to set prices for your ecommerce store's items. It's also a great way to attract price-conscious consumers that don't mind spending some time hunting for the best deals online.
If you want to simplify your pricing process and sell more items, use the tips in this article to discover how cost based pricing can benefit your store.
How cost based pricing works
You only need to know your fixed costs and target profit to use cost-fixed pricing. Start by determining the cost of obtaining the products that you sell. Ideally, you should include the cost of shipping, handling and other variables. If you buy directly from a wholesaler, though, you probably don't need to think much about these variables since many companies include them in their prices.
You only need to know your fixed costs and target profit to use cost-fixed pricing.
Once you know the cost of obtaining an item, you multiply it by your target profit. Let's say that you purchased item X for $100 and you want to earn a 33 percent return on your investment. When you multiply $100 by 33 percent, you get $33. Now, add $100 and $33 to get a sale price of $133.
Alternatively, you can multiply the direct cost of item X ($100 in this case) by 133 percent to avoid the final step of addition. Either way, you'll get the same sale price.
To summarize, you can use the following equation to determine your sale price when you use cost based pricing:
X times ROI plus X equals price, where X is the cost of obtaining your item and ROI is your desired profit.
By using cost based pricing, you don't have to think about the perceived value of your products. As the name suggests, you base the price on how much you paid for the product and how much profit you need to make.
Why cost based pricing attracts price-conscious consumers
Price-conscious consumers want to spend as little money as possible on the items that they need. Most of them don't care about the perceived value of luxury brands. They wouldn't spend an extra $50,000 on a car just because Mercedes-Benz or Ferrari made it. They want straightforward products at reasonable prices.
Price-conscious consumers want to spend as little money as possible on the items that they need.
If you want to attract price-conscious consumers to your ecommerce store, then cost based pricing gives you an advantage over stores that try to charge extra for perceived luxuries.
Success depends on lowering manufacturing or wholesale costs
Don't assume that cost based pricing will always give you an advantage over other ecommerce stores, though. Plenty of stores use this approach to pricing because they understand the benefits of attracting more customers.
Don't assume that cost based pricing will always give you an advantage over other ecommerce stores.
Obviously, you could make your online store more competitive by lowering your expected ROI. That strategy, however, can leave your online business underfunded. You can only cut your profits by so much before selling items online becomes a waste of time. Most companies agree that they need to earn at least 30 percent ROI. If you can't compete with other stores without going under 30 percent, then you need to find another way to keep your prices low for price-conscious customers.
Since you only have two variables in cost based pricing, you know that you need to lower your procurement costs to make your products more appealing to customers. If you can lower the cost of obtaining products, then you can charge lower prices without sacrificing your ROI.
If you're responsible for manufacturing your products
If you're responsible for manufacturing the products that your ecommerce store sells, then you need to find a way to lower your manufacturing costs. The strategy that you use will depend on several factors, such as the type of items you sell and how much control you want over quality. Despite unique factors that apply to your business, you should consider lowering your cost based prices by:
Making your manufacturing process more efficient.
Finding more efficient delivery methods.
Choosing less expensive parts and materials for making your products.
Contracting your manufacturing needs to another company.
Manufacturing your products in a country with low labor costs.
You don't necessarily have to lower your investment by much to attract price-conscious consumers. You may find that you can beat your competitors by lowering your prices by as little as $0.25. If shoppers really want to save money, then they'll gladly take the cheaper option even if it only saves them a small amount.
If you buy your products from a wholesaler
Your strategy changes if you buy your products from a wholesaler. Some practical ways to lower your investment include:
Buying more products to take advantage of bigger discounts.
Comparing wholesalers to find a cheaper option.
Negotiating with the wholesaler for lower prices.
Committing to an extended contract in exchange for a price reduction.
Exploring companies located overseas for better deals.
Again, even a slight reduction in your initial investment can make your ecommerce store more competitive. The more research you do, the more likely it is that you can lower your prices, attract more customers and boost your earnings.
Cost based pricing can benefit your ecommerce store in several ways. It isn't the perfect option for every company, but it can help increase your revenues by appealing to consumers that want to spend as little money as possible.
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