Pricing Your Products

In our scramble to find a way to offer the lowest prices on the Internet, we often overlook the basic steps that we should be taking BEFORE we even offer a product for sale.

We also overlook something even more important: you don’t HAVE to have the lowest price in order to make great sales. Following are some things I do before and after determining my bottom line. I sell by having products drop-shipped for my sites, which works VERY well, but these steps should be covered no matter your distribution method.

Should you be selling this item now?

Snowboards don’t sell well in the summertime. You may have a hard time moving a pair of roller blades in January. Don’t waste your time and your site space marketing products out of season. Ask your supplier for a little historical information regarding the best time to sell their products. Believe me, to everything, there IS a season. They have the figures. If they don’t want to share this info with you, find another supplier.

Identify your costs

Profit isn’t just the difference between wholesale and retail. You have other costs to consider. Think about every penny you spend in order to get that product to the customer’s door, and plan accordingly. For example, your merchant account probably costs you about 2.2% plus 30 cents per transaction. On an item you’ll sell for $20, that’s 74 cents. Don’t forget that calculation when pricing the item. Are you warehousing the item? How much is that space costing you per item per month? Did you spend money stocking up on shipping materials? How much per unit? What about advertising? Monthly hosting costs? You may need to project some estimated sales in order to arrive at some of these figures.

This may seem very complicated, but it’s really not. Just take the figures one at a time, and you’ll arrive at a wholesale cost plus an amount that, when added together, becomes your initial ESTIMATE of “cost of goods sold”. Identifying all your costs is critical if you want to price your products properly.

Check out the competition

Search on the item you plan to sell. Check out the competitors’ prices. But DON’T get caught up trying to beat the wrong competitor. You need to stay within your “venue”.

My stores are built in Yahoo Shopping ( 90% of my traffic comes from there. When I seek out my competitors, I look for other businesses like mine ONLY in Yahoo Shopping. Then I compare.

If I’m thinking about selling a product, and I get 1,500 hits in 400 stores on that item in Yahoo Shopping, forget it. If I get a hundred hits in 20 to 40 stores, I’ll look into it further.

So check out the competition, narrow down your product list, make a note of the five lowest prices you find, and then ask yourself another question:

Is anybody going to buy this thing?

This doesn’t have much to do with pricing, but it should be said.

When considering products, there’s unique, and then there’s too unique. Yak Cheese may sound like something that nobody else has for sale on the ‘Net. There’s a reason for that. If you sell more than 3 boxes a year, I’ll EAT some.

Unique is Rain Barrels made in Maine. It’s Exotic Cheeses imported from Italy. Silk Parisian Lingerie. Things you don’t see every day, but would be proud to give as a gift.

Then there’s “common”. Everybody and their grandmothers are selling Alabaster Figurines on the Internet. Do they sell? Sure, in a limited fashion. Do you want to sell them? Not if you want to make any real money.

In my experience, unique products, like Rain Barrels and Parisian Lingerie, DO sell. So do Coleman Sleeping Bags, and Conair Hair Dryers. BRAND NAMES sell. Look at your potential product, and ask yourself honestly if YOU would buy it on the ‘Net.

Set your price

Take the five lowest prices you collected on a product in your list that has survived the above. Calculate your estimated cost, then subtract that from the lowest price. If you don’t see at LEAST 15% profit, don’t bother.

If you do, there are a couple of ways to proceed. You can undercut the lowest price in your “venue” by a bit, and hope to “kick off” the product and get yourself noticed. Chances are, though, that the following week you’ll find that someone has undercut YOUR price by just a bit. That becomes a losing game.

I generally set up a couple of “loss leaders”. These are desirable items (in my general product line) that I sell dirt cheap just to bring in customers. Then I price the rest of my products at the second or third lowest price in my venue. The customers come in for the loss leaders, and then I can market everything else to them via email. I spend a lot of time making my site look better and easier to navigate, and pay a great deal of attention to my customers.

That makes me more reputable in the eyes of the customer. You’ll find that people don’t mind paying just a little more if they feel comfortable in your store. They don’t like to worry that they’re buying from a “hack” who may not deliver. Nothing says “hack” like a cluttered, confusing storefront.

Follow up

After you’ve sold an item for a month or two, revise that “cost of goods sold”. Measuring past performance is just as important as setting the correct price to begin with. If sales drop, recheck your competition. If that’s not it, drop the product, or shelve it until the “season” comes back around. Don’t get sentimental about your products, and NEVER just let your store sit there in limbo once it starts to make money. This is a dynamic business; stay on top of it!

A last word (or three)

Retail pricing on the Internet is so fraught with permutations that it would be impossible to cover everything here, even if I KNEW everything. The steps above are just the basics of a process that works for me. Hopefully something here will strike a chord and work for you as well. Patience and persistence are the keys to a successful Internet business, so hang in there, and don’t quit the day job for at least a couple of weeks. ;o)

I hope this helps in your future marketing decisions.

Choosing a Niche Product to Dropship

Time and time again I recommend that you choose a niche product to dropship from your website or sell on eBay. But how do you choose your niche? The following are brainstorming tips to help you come up with a niche product that can be sold online.

First: Check Your Purchases. Many prospective online entrepreneurs try to think of really out-there products like unicycles or bamboo knitting needles so they can enter a market that isn’t too saturated. This is a good idea in some respects, but one of the most important factors when choosing a product is to choose something that people actually buy online. One way to brainstorm this type of product is to think what you yourself buy online.

In the past month, I’ve bought three second-hand novels written by Mildred Walker, a pair of studded motorcycle boots, a Hebrew-printed t-shirt, tickets to a murder mystery play, a pair of Cubs swim trunks, and a calligraphy set. Not surprisingly, almost all of my purchases represent niche markets. Why is that? Because with the exception of a few broad categories like electronics, most items bought online are niche products. This is because common, general products can easily be purchased at physical locations close to your home. You go online to find unusual items that can’t be bought at the mall.

Second: Check Logistics. Let’s assume that I want to dropship my products, not purchase them wholesale. This means that some of the products I purchased last month are out of the running for my niche inspiration. Used books aren’t generally dropshipped, and neither are theater tickets. Shoes and clothing are usually sold wholesale, but in this case the items that I bought might still be appropriate since they weren’t common apparel and accessories. The studded motorcycle boots might be a good candidate for a dropship niche product for a few reasons: first, they are a product that’s not easily found in local stores. I bought those boots online because after searching the three malls in my area I couldn’t find anything quirky enough to satisfy my Sarah Connor Chronicles obsession.

The studded motorcycle boots are a good pick for another reason: they’re a theme product that I could easily build a whole product line around. With the boots as my central product, I could have a goth/punk/emo website, a motorcycle apparel site, or a studded leather accessories site. Finally, while I might not be able to find this product through a dropship supplier, they are expensive enough that I could possibly use a wholesaler to dropship them. Let’s say my wholesale supplier has a $100 order minimum: if a single pair of studded boots costs $125, I can likely have single pairs shipped directly to my customers even though the supplier is ostensibly a wholesaler.

Stay tune for more tips on choosing a niche to dropship products.

The Product Life-Cycle Concept

Because we live and work in a dynamic market situation, managers must accept as the normal state of affairs that all products have a limited life. This fact is commonly expressed in the form of the product life-cycle curve. Products during their existence go through the phases indicated on the curve, as follows:

1. Starting before, sometimes long before, a product reaches the marketplace, there is a development phase. Market research must be undertaken, the product designed, prototypes built, plants laid down. While costs can be very high, income will initially be nil and will probably grow only slowly. Profits are a long way off yet. Many products are slow to ‘catch on’ and this part of the curve typically does not rise steeply.

2. During the growth phase the product reaches general acceptance, and sales increase steeply. Profits mount as development costs are recovered and unit costs decrease with greater volume of production.

3. As the product reaches maturity, initial demand is beginning to be satisfied, competitors may have arrived on the scene, and there will be greater reliance on replacement sales. Sales increase more slowly, and profits come under pressure and may start to decline.

4. When the market is fully saturated, sales will ‘peak off’ and profits decline still further.

5. Finally, sales will go into definite decline and margins come under very severe pressure as it becomes increasingly costly to maintain sales at a reasonable level.

The curve for any particular product may be steeper or flatter, the time-scale may be longer or shorter. Some products seem to go on for a very long time. For this reason the pattern must be applied with care. In addition, we must be careful what we mean by a product in this context: for example, the market for glass has risen steadily over the past 50 years, but within this period the sale of lamp glasses has declined and that of milk bottles has risen steeply (to decline again in some countries in face of competition from waxed cartons or plastic and the change from doorstep delivery to bulk purchase from the supermarket).

Nonetheless the typical pattern stands as a warning that it is dangerous to rely too heavily for too long on one product, so that, as profit from one declines, profit from its successor rises to fill the gap. Ideally this will give a steadily rising profit for the company as a whole, even though some products have entered the ‘decline’ phase of the product life-cycle.

It must be emphasized that the product life-cycle diagram is not a rigid description of exactly how all products always behave. Rather it is an idealized indication of the pattern most products can be expected to follow.

There is nothing fixed about the length of the cycle or the lengths of its various stages. It has been suggested that the length of the cycle is governed by the rate of technical change, the rate of market acceptance and the ease of competitive entry. So, each year numerous new fashion styles are introduced, many of them to last only a few months. At the other extreme, a new aircraft must have many years of life if it is to be commercially worthwhile.

The main importance of the life-cycle concept is to remind us constantly of the three following facts:

1. Products have a limited life;
2. Profit levels are not constant but change throughout a product’s life in a way that is to some extent predictable;
3. Products require a different marketing programme at each stage of their life-cycle.

Implications of the Product Life-cycle

If we have to accept that no product will go on earning profits indefinitely, then we must plan so as to have a whole succession of new products coming ‘through the pipeline’. Peter Drucker has drawn attention to the need to keep all products under review to ensure that not too high a proportion are at the end of their life-cycle. He describes the following six categories:

1. Tomorrow’s breadwinners – new products or today’s breadwinners modified and improved;
2. Today’s breadwinners – the innovations of yesterday;
3. Products capable of becoming net contributors if something drastic is done;
4. Yesterday’s breadwinners – generally products with high volume, but badly fragmented into ‘specials’, small orders and the like;
5. The ‘also raps’ – generally the high hopes of yesterday that, while they did not work out well, nevertheless did not become outright failures;
6. The failures.

Product Elimination

From the product life-cycle concept and Drucker’s analysis of product categories, it follows that all products must be kept under review to assess their present and likely future contribution to profits. A common mistake of marketing management is to keep in the range products that have little or no prospect of contributing to profits. Products are kept in the range until they fade away, meanwhile consuming valuable resources, which could be more profitably utilised elsewhere. These marginal products lower the company’s profitability, and it is essential to control them.