In the dynamic landscape of e-commerce, pricing your products effectively is a critical determinant of success. Every supply chain step impacts your pricing strategy, from the initial factory cost of goods to the final transportation and fulfillment through third-party logistics (3PL) providers. In this guide, we'll delve into the factors to consider and the best practices to adopt for optimal pricing strategies in the online marketplace. We will use a women’s fashion shirt as an example to figure out how to price it strategically.
Understanding Factory Cost of Goods:
The journey of pricing your products begins at the factory cost of goods. This includes all expenses associated with manufacturing or procuring your products, such as raw materials, labor, and production overheads. Calculating these costs accurately forms the foundation for setting a profitable price point. For our example, the factory cost of goods is $6.50 per unit.
Incorporating All Shipping Costs:
Shipping costs play a significant role in determining your product's final price. Whether you offer free shipping or charge separately, you must factor in shipping expenses, including packaging materials, carrier fees, and fulfillment center charges. Balancing competitive pricing with covering shipping costs is crucial for maintaining profitability. For our example, a 40’ container of these women’s fashion shirts (all SKUs) costs $5,000 and has 10,000 shirts inside the container. The cost per unit is $0.50 per unit, which you add on to the factory cost for a running total of $7.00 each.
Calculating Landed Cost:
Landed cost encompasses all expenses incurred from the factory to the warehouse or fulfillment center. It includes not only the factory cost of goods and shipping costs but also customs duties, taxes, and import/export fees. Accurately calculating landed costs provides a comprehensive understanding of the total investment per unit, guiding your pricing decisions. For our example, women’s fashion shirts carry a duty rate of 12%. To calculate this, you take the factory cost of goods ($6.50) multiplied by 12% and you get a landed cost of $0.78 per unit. This makes your running total per shirt now at $6.50 + $0.50 + $0.78 = $7.78.
Transportation and 3PL Considerations:
Transportation to fulfillment centers or warehouses becomes paramount once your products are manufactured and ready for distribution. Utilizing third-party logistics providers (3PL) for warehousing and order fulfillment adds another layer of cost to consider. Evaluating transportation and 3PL expenses enables you to streamline operations and optimize cost efficiencies. For our example, let’s assume the cost of drayage of the 40’ container to your 3PL is $500. The $500 drayage cost divided by 10,000 units = $0.05 per shirt. Next, you’ll need to add your 3PL costs per unit based on your sales projections, storage projections, and materials usage, not order shipping costs (more on that below). For our example, let’s assume the 3PL costs per unit comes to $3.00 per unit. This brings the total per unit of $7.78 landed cost, plus $0.05 drayage, plus $3.00 3PL costs for a total of $10.83 per unit.
Shipping Options:
Understanding what your competitors and your particular industry niche offer in terms of shipping is key to creating expectations for maintaining overall margins. Do your competitors always offer free shipping, or just during small windows throughout the year? Do you need to match this to stay competitive? If your products are unique enough that you do not need to offer free shipping to get the sale, then you can maintain a better profit margin. If you offer free shipping all the time, then that lack of margin needs to be calculated so you do not operate at a loss.
Market Research and Competitor Analysis:
A thorough understanding of your market landscape and competitors' pricing strategies is indispensable. Conducting market research helps identify price elasticity, consumer preferences, and competitive benchmarks. Analyzing competitor pricing provides insights into industry standards and enables you to position your products competitively while maintaining profitability. For our example, let’s assume your immediate competitors are retail priced between $76 - $94 per unit.
Value Proposition and Perceived Value:
Beyond cost considerations, your product's value proposition and perceived value influence pricing decisions. Highlighting unique features, superior quality, or exceptional customer service enhances perceived value, allowing you to justify premium pricing. Aligning your pricing with the value customers perceive in your products fosters brand loyalty and drives sales.
Pricing Psychology and Strategy:
Employing pricing psychology tactics can influence consumer behavior and purchase decisions, too. Charm pricing (e.g., $9.99), bundle pricing, or tiered pricing structures can enhance perceived value and incentivize purchases. A/B testing different price points helps identify optimal pricing strategies that resonate with your target audience.
Dynamic Pricing and Adjustments:
Market conditions and consumer preferences are constantly evolving, necessitating dynamic pricing strategies. Monitoring demand, analyzing sales data, and gathering customer feedback enable you to make informed pricing adjustments. Whether it's offering discounts and promotions or adjusting prices based on seasonality, staying agile ensures your pricing remains competitive and responsive to market dynamics.
Final Pricing Example:
Your landed cost is $10.83, not including any order shipping, marketing, sales costs (commissions, seller fees, credit card transaction fees), or operational costs. You want to compete with your competitors at the lower end of the retail price spectrum at $70/unit. Your costs could quickly escalate to almost $35/unit “all in” without shipping costs factored in. This would give you a 50% margin for selling the women’s fashion shirt at $70.
Conclusion:
Pricing strategies for selling online encompass a multifaceted approach, from factory cost of goods to transportation and 3PL considerations. By understanding the intricacies of each factor and adopting best practices such as market research, value proposition alignment, and dynamic pricing, you can optimize your pricing strategy to drive online sales and maximize profitability in the ever-evolving e-commerce landscape.
Verde Fulfillment USA has 11 fulfillment centers in six cities across the US. We help hundreds of brands with their direct-to-consumer orders, B2B retail orders, and EDI distribution center orders to some of the largest retailers in the country. Contact us if you would like to learn more about our capabilities and how we can help your brand grow. We’re always happy to help! Click Here