Are you ready to list products to your online store? Congratulations on making is this far! There are plenty of articles that say starting an eCommerce business is a piece of cake, but it’s quite the contrary. Starting anything from scratch is never easy and you will always be met with challenges.
If you’ve made it to this column without reading the rest of the How to Start an eCommerce Business series, I encourage you to go back and browse through. I include valuable advice on the different steps of starting your own online store that is unique to my experiences as an eCommerce entrepreneur.
Step 1: Choose a Product Niche
Step 2: Choose a Fulfillment Strategy
Step 3: Build Supplier Relationships
Step 4: Choose a Store Building Platform or Online Marketplace
Step 5: Build an Online Store with WooCommerce
In this column, we are going to discuss listing your products and how to properly price them to achieve your desired gross profit margin on each sale. There will be a higher degree of math involved in the pricing section so feel free to reach out if you encounter any issues or need further explanation on how I put together the pricing formulas.
Why your product pricing is so important
Before diving into the best practices of listing new products and setting pricing for each one, I’d like to explain why your pricing is so important to the success of your online store.
Without sound pricing that accounts for all of the costs that go into purchasing and fulfilling your products, you have much less control over the profitability of your store. No one wants that! Every person starting an eCommerce business wants it to produce profits so that they can invest in more inventory, support their family, and pay for employees to help grow the store.
An Example of Where Pricing Goes Wrong
To best illustrate the importance of proper pricing based off the cost of the product, let’s look at an example.
John is a new store owner and he is working with his supplier through a drop ship relationship where he lists the product and the supplier ships it to the customer. He is new to selling online and is excited to get his products listed and selling through his online store. John buys the product from the supplier for $30 and he wants to make a 50% markup on each sale so he prices it at $45 on his online store (Math: $30 plus $30 multiplied by 50%). John gets his products listed and is excited to see a good chunk of sales within the first few weeks of having his products listed. He projects that he is making $5 on each unit sold after an average shipping cost of $10 per unit (Math: $45 minus $10 shipping minus $30 product cost). John sells his product for an entire month thinking that he’s made around $500 off the 100 orders that he sold. Then the wake up call comes. Unbeknownst to John, the supplier also has a $5 drop ship fee and he was not calculating for the percentage that Shopify takes for processing the payment. Now John is in a situation where his total earnings for the month are slightly below break even. John did not properly price his products when he started and it stripped him of what could have been around $500 in profit.
It’s such a shame when examples like this happen. But like I said, starting and building a profitable eCommerce business is not easy.
I’ve been creating pricing formulas for my eCommerce businesses for the past 7 years and there is plenty of trial and error that much be involved to find the optimal price for your products. I made mistakes at first and made quick adjustments before anything tragic happened. As an eCommerce business owner, you must have someone on your team who can focus on properly pricing your products. Without it, you may end up in a situation like John. And no one wants to be in that situation.
How to Create your Pricing Formulas
Below, I break down how to create pricing formulas for your company so that when you list your products for sale, you are in a place to make your desired profit margin. Again, we’ll look at an example so you can easily follow along.
I own an online store through the Shopify platform and I am selling a selection of tee shirts, all of which cost the same amount to purchase and ship. They are being shipped by the supplier and I have a great shipping agreement with USPS where I receive low shipping costs.
The first step is to lay out all of the costs associated with purchasing and shipping the product to the customer. I call this metric the REAL COST.
Product cost = $15
Drop ship fee = $3 per order
Shipping cost = $5 per order
Shopify payments = 2% of order. Estimate at $30*.02 = $0.60
REAL COST = $23.60
Next, you want to state what your desired profit margin is. Let’s say that our desired profit margin is 30%. This means that we want to make a 30% markup off the real cost.
Desired profit margin = $23.60*0.3 = $7.08
For the purposes of this activity, let’s call it $7.00 even.
That means that we must make $30.60 in total revenue to make that $7.00 profit margin. With the percentage taken from the Shopify payments being an estimate, our calculations will not perfectly check out, but they will be as close as they possibly can without applying more advanced mathematics.
Let’s go backwards to check our math.
Listing price = $30.60
Shopify payments fee = $0.60
Remaining revenue = $30.00
Real cost = $23.00
Gross profit = $7.00
See how that works?
Imagine if we had just added $10 to the cost that we purchased the tee shirt from our supplier. We’d be losing money on every single order. If there is one way to get frustrated and give up on growing an eCommerce store, it is improperly pricing your products and then realizing that you are losing money on every single order that you’ve fulfilled.
I just gave an example of an eCommerce business selling one specific product on the Shopify platform through a drop ship relationship. That is very specific. The point is that pricing formulas will slightly vary across different types of eCommerce businesses and selling platforms. When you sell on Amazon, they take an additional percentage of the listing price, usually between 12% and 20%, that further cuts into your profit margin. You must make sure that you are accounting for that when listing on their platform.
The most important thing to remember when pricing your product is to focus on the REAL COST. If you are creating your pricing based off of the real cost, you will be in great shape. Just make sure that your REAL COST has all associated costs with purchasing and fulfilling the product.
Listing your Products on your Online Store
Similar to creating your pricing formula, the process of listing is going to greatly vary depending on the platform that you are using. Amazon is different from eBay. Shopify is different from WooCommerce. So on and so forth. However, the actual product information that you need to create a highly converting product listing is not so different.
Below are the main pieces of product information that you will need.
- Product name
- Product short description
- Product long description
- Product bullet points
- Shipping policies
- Return/exchange policies
- Color (if applicable)
- Size (if applicable)
- Product category(ies)
- Product images (high resolution)
- Product listing price
- Number of product in stock
- Shipping cost (if applicable)
- SEO title, URL, meta info, keyword
- Tags (if applicable)
- Internal SKU
The most effective way to organize all of this data is in an Excel spreadsheet or an online database. To obtain all of the information, you will need to speak with your supplier. They should have all of the data and should be able to provide it to you quickly. If they do not have this data, there is a chance that they will be difficult to work with in the long run as well.
No matter which platform you are using, they will have all of these fields and more in their product template. To get familiar with the data, I encourage you to list each product 1 by 1 to start. Once you are an expert at 1 by 1 listing, you can explore the platform’s options for bulk uploading new products. This will require a more advanced know ledge of Excel and CSV files, but it can absolutely be done and will increase the efficiency of your listing process.
Bringing it all together
Listing and properly pricing your products is a key step to building a profitable eCommerce business. Everything else about your online store could be absolutely perfect, but if you mess up your pricing and listing, your store will not be profitable.
Don’t let that bring your eCommerce business down! If you need additional help pricing or listing your products, let me know in the comments or email me at Connor@ConnorGillivan.com.