Pricing your products
When you add products from suppliers to your Shopify store, you need to set your own prices for your products. To profit from selling these products, you need to choose a price that is higher than what your supplier charges you.
The price that your supplier charges you is known as product cost. For example, if a supplier charges you $10 for a sofa pillow, then that sofa pillow's product cost is $10. Your profit is the difference between the product cost and the price that you charge your customers
Strategy for pricing your products
Consider the following points when pricing your products:
The extra value you provide - Building a business takes time, effort, and money. Any content that you create, unique combinations of products that you find, or extra customer support that you offer can all increase the value of your products. The resources that you invest and any additional value that you provide to your customers should be reflected in the pricing of your products.
Other expenses or business costs, such as marketing expenses, your Shopify subscription, and transaction fees - Consider these expenses when setting prices for your products. These are necessary business costs, so it's important your price covers these costs at the very least.
Competitors' prices for similar products - Looking at stores that sell similar products can help you determine the average price of the products you're selling.
Example: Setting prices for a product line
Tania is a professional drummer who makes video tutorials for beginner drummers. She also wants to test selling drumsticks on her website to see if she can make money from the online traffic her videos bring. She finds three types of drumsticks that are good for beginner drummers. She decides to test her drumstick business for a month.
She has the following information to consider:
- She plans to sell three types of drumsticks: hickory, maple, and oak. These cost her $3.50, $4, and $4.50 per pair respectively.
- She wants a total profit of at least $200 for the month.
- She expects to sell 50 pairs of drumsticks.
- Hickory drumsticks are more popular than the other types with beginner drummers.
- She plans to spend $50 on marketing ads and has a marketing app that costs $5 per month.
- Her Shopify plan for the month is $29.
- Her supplier provides free shipping.
Breakdown of costs
Tania has costs each month regardless of her sales. She also incurs costs each time she makes a sale.
She has the following fixed costs for the month:
- Shopify subscription - $29
- Marketing - $50
- Marketing app - $5
Her total fixed costs each month are $84.
Each time she makes a sale, there is another cost that varies based on the product ordered. Of her 50 orders, Tania expects that 25 will be pairs of hickory drumsticks, 20 will be maple, and 5 will be oak.
She has the following expected variable costs for the month:
- 25 pairs of hickory drumsticks at $3.50 per pair - $87.50
- 20 pairs of maple drumsticks at $4.00 per pair - $80.00
- 5 pairs of oak drumsticks at $4.50 per pair - $22.50
This gives her a total of $190 in variable costs.
Combined with $84 in fixed costs, she expects to have a total cost of $274.
Breakdown of profits
Because Tania wants to make $200 this month, and expects a total cost of $274 for the month, she needs to make $474 this month to achieve her goals. Tania is expecting 50 sales, which means she needs to sell her drumsticks at an average of $9.48 to reach her goal of $474.
Tania wants her hickory drumsticks to be the cheapest to be competitive. She wants to sell them for $7. This means that the remaining $2.48 per drumstick needs to be added to the maple and oak drumsticks.
If she sells her hickory drumsticks at $7 and sells 25 of them, then she makes $175 of her $474 goal and needs only $299 more. To make $299 from the remaining 25 orders, the maple and oak drumsticks need to be priced at $11.96.
Part of Tania's marketing campaign is to offer her hickory drumsticks at $5 to the first 5 people who purchase them. Based on her current pricing and profits, that would reduce her profit by $10. To still reach her goal, Tania needs to recover that $10 in the remaining orders, but she doesn't want to increase the price of the hickory drumsticks.
Tania needs to make an additional $10 on her 25 orders of the remaining drumsticks, leading to an increase of 40 cents per order and a price of $12.36.
After everything is taken into consideration, Tania decides to price her products as follows:
- First 5 hickory drumstick pairs at $5
- Remaining 20 hickory drumstick pairs at $7
- 20 maple drumstick pairs at $12.36
- 5 oak drumstick pairs at $12.36
Tania knows that all this is based on her own estimates. After the month is over, she will likely need to revisit her prices and see what makes sense for the next month based on her store's sales in the first month.
Accounting for third-party transaction and credit card fees
Third-party transaction fees and credit card fees are other variable costs that can be taken into consideration. The process to determine what your prices should be if you want to include these fees involves some math.
Generally, businesses increase the price to account for these fees only if specific profits need to be met and most businesses do not include them. However, they are a cost to be aware of if your profit margins are very low.
Use the following formula to determine prices that include these fees:
x - z(x) - b = y.
xis the price that you end up with.
zis your combined percentage fees as a decimal, so 2.9% would be written as
bis the combined fixed portion of your fees, so for a rate of 2.9% + 30 cents, you would put
yis the initial price that you calculate to cover your costs without accounting for third-party transaction fees.
For example, suppose that you calculate that a price of $10 will cover your costs and profit expectations. If you have a third-party transaction fee of 2.9% + 30 cents, then your formula would be
x - 0.029x - 0.3 = 10, which results in a price of $10.61.
- Fill in the variables in your equation:
- If you have a value for the
bvariable, then add it to both sides:
- Resolve any addition:
- On the left side of the equation, factor out an
xfrom each term:
- Resolve the subtraction within the brackets:
- Divide both sides by what is being multiplied by
- Resolve the division:
Based on this calculation, you need to charge $10.61 to offset the credit card fees to receive $10 in revenue.