So many parts of starting a new business are exciting.
You have dreams of wild success and enjoying the freedom of working for yourself.
But every business owner has to deal with one especially tricky problem: figuring out pricing.
Setting the pricing for items in your online store is one of the hardest parts of setting up a new business.
If your prices are too high, you’ll lose sales. If they’re too low, you won’t make enough profit.
Either way, your business faces a real possibility of failure.
Your success depends on getting this right, yet there’s no clear right answer to what you should charge. Here are a number of steps you can take to make an informed decision when setting your pricing.
Step 1: Consider your business costs.
Every business has expenses. Your pricing needs to account for the amount you’re paying into the business if you ever want to make a profit. Hopefully you’ve been tracking your expenses as you go and have a fairly clear idea of the budget you’ll need moving forward. If not, then your first step needs to be tallying up all your costs so far and those you expect to take on in the near future.
Your list will likely includes the cost of items such as:
-Any supplies needed to make the product you sell
-Various supplies needed to run your business – ranging from higher-cost items like computers and furniture, to smaller items like pens and paper
-Designing your website (or hiring someone to do so)
-All your marketing efforts
-Any labor your hire – including employees, contractors, and specialists like your accountant
Even if your business is relatively simple, your costs do add up and you need to be confident your pricing will help you make that money back (and then some).
Step 2: Consider your time.
Just as you track your expenses, you should be tracking your time whenever you work on your business. You can find a number of free time-tracking tools, such as Toggl and My Hours that will help you gain a complete picture of how much time you’re putting into this store.
In the early days when you’re just getting set up, you likely won’t be making anything back for that time, but eventually you need to for the effort to be worth it. Your pricing therefore needs to consider your labor, as well as your costs.
Figure out two numbers:
1. How much would you like to be paid for your time – if you’re being ambitious?
2. What’s the bare minimum you feel you need to be paid for your time for this business to pay off?
That range will help you clarify how much your business needs to make for you to be happy with the profits you earn for the amount of work you put in.
Step 3: Research your competitor’s prices.
The first two steps make it easy to think big and might make you inclined to price high, but this is the step where you have to figure out what’s realistic in your industry. Spend some time browsing the websites of people selling similar products. Think like a customer: do searches for the terms they’re most likely to use to find products like yours and check out what’s typical on the websites that show up first.
Record what you find as you go in a spreadsheet so you can better see the trends in pricing in your industry and track how prices vary across products with different sets of features. At the end of this exercise, you should have a good range in mind. You want to know both the low and high ends of pricing in your industry, and have an idea of what’s different about the brands that charge prices on the higher end.
Step 4: Figure out your unique positioning.
If seeing what businesses were charging on the low end of your range in step three was disheartening, don’t let it get to you. You can go higher than your competitors if you can figure out what makes your business or product special.
Whether it’s because your products look better, last longer, or work better in some key way, if you can find the thing that differentiates what you’re selling from the low-end options out there, then you can convince customers it’s worth paying more when they buy from you. A marketing consultant can help you with this step if you’re having a hard time on your own. It’s part of their job to help clients figure out clear brand positioning.
Step 5: Consider shipping.
Shipping costs are an inevitable part of online business. People hate paying for shipping and the added expense immediately makes your products look more expensive. In one survey by UPS, 44% of customers said they’ve abandoned an online purchase because of high shipping costs.
You have a few options here:
Option A: You can stick with passing the cost of shipping onto your customers. Many businesses do this, but you increase the chances of shopping cart abandonment.
Option B: You can offer a flat fee for all shipping – say something like $5 – so it doesn’t look too high to customers, but also means you’re not having to cover the full costs of shipping yourself.
Option C: You can offer free shipping for orders over a certain amount. This is becoming an increasingly common option businesses offer as it encourages customers to spend more, so while you do have to pay more in shipping costs, you end up making more on the order as a whole.
Option D: You can offer free shipping on all orders and raise your prices to account for the difference. The main risk here is that your products will look more expensive at a glance, which could drive customers away.
Any one of these options can work and you could potentially try out different ones over time to see what gets the best results. Having a clear idea of how you’re going to handle shipping is important as you reach your final step.
Step 6: Set your prices.
Even all your prior research won’t make this step easy, per say, but it will give you the information you need to make an informed decision. At this point, you just have to do it.
Set pricing that falls within the range of what you found your competitors charging, while being high enough to cover your expenses and allow for some healthy profits besides. Make sure the prices are high enough to leave some room for discounts and specials. You don’t want to lose money when great sales opportunities like Black Friday roll around.
Determining your pricing isn’t fun, but it’s an important step toward making money (which is fun). You might not get your pricing just right on the first try, and it’s okay to change it later if you need to. By doing the proper research and really thinking through each of these steps though, you should come close to finding pricing that will work for your business.
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Kristen Hicks is an Austin-based freelance content writer and lifelong learner with an ongoing curiosity to learn new things. She uses that curiosity, combined with her experience as a freelance business owner, to write about subjects valuable to small business owners on the HostGator blog. You can find her on Twitter at @atxcopywriter.