When it comes to launching a new business or bringing a brand new product or service to market, entrepreneurs often overlook one of the most important aspects of sales that can determine whether or not their product flops from the get-go – pricing.
Even though it isn’t as exciting as product development and marketing, getting your Shopify pricing strategies right is one of the most critical things you can do as a business owner in the very early stages of your product launch.
By considering factors such as what your target audience can afford, whether you’re developing a mass-market product or premium product, and how much profit margin you’d need to remain competitive after calculating all of your sales and overhead costs, you’ll immediately be ahead of 99.9% of the competition.
In this guide, we’re going to dive into Shopify pricing strategies and premium pricing strategy in great detail and show you exactly how you can effectively price your products and services the first time around. You’ll learn about why you need a solid pricing strategy, what e-commerce costs you need to take into account, how you can define your sales goals and objectives, and the most effective pricing strategies you can implement into your business as soon as today.
By the end of this guide, you should be well-equipped to tackle any pricing decisions and understand precisely how pricing directly impacts your sales and penetration into your ideal marketplace. Ready to begin? Let’s jump right into Shopify pricing!
Why you need a Shopify pricing strategy
You’ve likely heard the phrase, “Failing to plan is planning to fail,” at one point or another; this quote certainly holds true with pricing strategies.
If you take the time to develop a Shopify pricing strategy upfront, including techniques such as dynamic pricing or psychological pricing, looking at what the competition is doing, and identifying exactly what your target audience is willing to pay for your products or services, you’ll be ever closer to identifying the perfect price for maximizing sales volume and gross profit margins for your business.
You need a pricing strategy in order to ensure that your pricing isn’t so far outside what your customers are willing to pay that they find your products and services priced “outrageously,” something that can cement a negative perception of your company in their minds. On the flip side, you want your product or service to solve a major burning need or problem in your target market, all while simultaneously being priced at a level that they can’t resist.
Your ideal customer should see your product and immediately think, “Wow, I’d be a fool not to purchase this straight away!” This is our goal for pricing – to achieve a perfect balance between sales volume and the amount of gross profit you’ll be able to generate from your inventory.
In the next few sections, we’re going to dive into pricing strategy in greater detail and walk you through the process of developing a solid Shopify strategy that helps your business achieve exponential growth and reach all of your goals, milestones, and sales objectives in record time.
Understanding your e-commerce costs
Understanding your e-commerce costs and production costs is one of the most important aspects of developing your pricing strategy since you want to be consistently profitable with the exception of loss-leader products that make a profit on the back end.
For the purposes of simplicity, we’re going to assume your Shopify store sells standalone products to your customers and wants to be profitable on the sales of these products.
In order to do so, you’ll need to know exactly how much it costs to package, ship, produce, manufacture, and promote your products before you’re able to get a sale.
If you choose to price your products below the cost of goods sold (COGS) and the final “landed” price, you’ll be going negative on each sale, which we’re looking to avoid at all costs. As mentioned previously, going negative on your initial sales to new customers can be an advanced “loss-leader” strategy, but you have to have the systems in place to make up for these losses in massive profits on the back end.
In this section, for the purposes of simplicity, we’re going to walk through the common costs a Shopify store is expected to have and develop a pricing strategy that allows you to be profitable with each and every sale.
Take note of each of these costs in your business, as it’ll directly impact the price you set for each of your products or services.
Packaging & shipping costs
Depending on the appearance of your packaging and the speed at which deliveries reach your buyers, your packaging and shipping costs can either be very low or very high. Our goal here is to achieve a nice “middle-ground” where you balance shipping speed (and subsequent shipping costs) with packaging that looks and feels “premium” to your customers but was obtained at a very low cost.
Take a look at all of your Shopify store’s packaging and shipping costs, and take note of them for each of your products and services. If you have a significant number of products for sale, start with your most commonly sold products, as those will make the biggest impact from the get-go.
Cost of goods sold (COGS) and production & manufacturing costs
If you don’t know your cost of goods sold (COGS), then you won’t be able to price your Shopify products or services very effectively. Your COGS is a sum of all the costs and expenses that go into producing the good or service you’re selling.
It’s important to note that COGS does not include overhead costs such as marketing, sales, and advertising; this metric only captures production and manufacturing costs. You can think of your COGS number as including the cost of all materials, labor, and parts required to produce your product.
Cost of marketing & promotional materials
Many new business owners and entrepreneurs often underestimate the amount of money they’ll spend on marketing and promotional materials when advertising their products to potential buyers. Since your marketing and advertising costs are directly related to your future profitability, you’ll also need to account for this in your product pricing strategy.
If you price too low, your marketing costs can potentially eat into your profit margins. Similarly, if you price too high, you might have enough of a buffer but be priced too far out of your target customer’s affordability range.
Short-term overhead costs
Short-term overhead costs such as loan repayments should also be included in your pricing strategy determination to ensure you’re being as thorough as possible in pricing strategy development.
Even though these costs don’t last for a significant period of time, it is still wise to include them and split these costs up over a fixed period, such as a year. This way, you’re accounting for the possibility that this fixed cost remains or comes back in the near future.
Putting all of your costs and expenses together
Once you’ve identified and calculated all of your Shopify store’s packaging and shipping costs, cost of goods sold (COGS), marketing and promotional costs, and short-term overhead costs, you’ll have a number that depicts your break-even point. This is the amount of revenue you’ll need to generate from each sale of your product to break even on every single sale – the bare minimum you should shoot for. As soon as you go under your break-even point, your Shopify store will start losing money.
Look at your break-even number and determine how far outside the average price of other products in the marketplace you are. If you’re way out of range, something in your supply chain is exceedingly expensive and must be addressed. Your goal is to be as close to the average price range of the marketplace as possible.
In the next few sections, we’re going to discuss how Shopify pricing compares to other e-commerce platforms and how you can define your sales goals and commercial objectives for maximum effectiveness.
Is pricing on Shopify different from other e-commerce platforms?
Pricing strategies on Shopify and online e-commerce can differ slightly from retail and in-person pricing, especially with how quickly customers can browse a competitor’s website or catalog.
Even though the differences between retail and online sales are very minor, when it comes to Shopify pricing, the main thing you should keep in mind is ensuring your price range is in line with what customers are willing and expecting to pay for your particular product or service.
Remember, if you add value to your product offering, you can still demand premium pricing when compared to the competition. Pricing strategies like bundle pricing, which we’ll discuss in a future section, can also allow you to command premium prices compared to the competition.
Take a look at what your customers are willing and expecting to pay, survey your marketplace, and then make pricing decisions with those data points in mind.
Defining your sales goals and commercial objectives
Before you can sell anything, you need a clear sales goal, commercial objective, and value proposition that you’re offering to your prospective customers. If you make an offer that’s compelling enough, you’ll have no shortage of buyers who are begging to buy from you.
As we’ve mentioned before, a very large part of how attractive your offer is to prospects is the price, which is the whole purpose of implementing a solid pricing strategy from the very beginning. We’re going to cover the process of defining your ideal customer, finding out whether they can pay your ideal asking price, and uncovering a value proposition that’s utterly irresistible to your prospects.
Who are your target market and ideal customer?
As a quick refresher, we’ll emphasize the importance of having your ideal target market and ideal customer in mind before you start pricing and selling your products. Are you selling to business owners, individual homeowners, or students?
A business owner will likely have a budget for your product or service; individual homeowners may be able to stomach a large expense due to savings and preparing for upcoming maintenance; a student, on the other hand, will likely not have enough funds to purchase your product or service easily.
Think deeply about who you’re selling to, as it’ll determine your pricing strategy and what you can set your Shopify store’s prices at comfortably.
Do they have the willingness and ability to pay?
Expanding on the previous point, you need to ensure that your target market has the ability and willingness to pay for your products and services. Just like the student example we mentioned in the previous section, if your target audience isn’t able to afford the products you’re selling, how can you expect to get larger volumes of sales?
Take the time to dig deep into your target audience. To make this process easier, you can even interview customers who are in your target market and ask them what they’d be willing to pay for your products or services. This is one of the best ways to come up with this information without “guessing” or “estimating.”
Discover your value proposition
After you’ve identified your ideal customer and have shown that they have the willingness and ability to pay the prices you have in mind, it’s time to bring everything together with your value proposition and offer.
Your offer is what you’re giving your customers in exchange for their money. Your offer includes, first and foremost, price; after price, you can add additional elements such as bonus content, packages, hands-on training, and more.
The goal of your offer is to make it irresistible and a “no-brainer” for your customers.
If your offer is put together well, they shouldn’t hesitate for a second to pay what you’re asking in exchange for your Shopify products or services.
Transform your value proposition into an incredible offer
To expand even further upon the previous step, the final step of your sales planning process is to transform your value proposition into an incredible offer your prospective customers can’t resist. This can be done by adding bonuses, add-ons, training, or other value to your product or service in order to make it more compelling and allow your customers to justify the price.
The best Shopify pricing strategies to implement today
You should now understand exactly what price point you need to have your products or services priced at to generate a profit, as well as the sales goals and objectives you’re attempting to reach – what’s next?
The next step in the process is to implement a proven Shopify pricing strategy that’ll allow you to price your products at levels that catch the eye of prospects and get them to buy from you again and again. Some of the common pricing strategy tips we’ll cover include competitive pricing, price skimming, keystone pricing, penetration pricing, bundle pricing, premium pricing, and more.
1. Competitive pricing
Competitive pricing is another word for “market rate” pricing, where you set the price of your products or services at exactly what the market is currently offering. To determine a competitive price for your products, all you need to do is look at all of the other products similar to yours and what your competitors are selling them at.
In case you’re in an industry saturated with competitors, it can make sense to slightly undercut your competitors on pricing but still remain in the competitive pricing range since you’re very close to the competition.
With Shopify and e-commerce, it is now easier than ever to compare prices with your competitors and ensure that you’re priced in the same range as other companies, adjusting slightly downward to give you a slight competitive advantage as required.
2. Price skimming
Price skimming is often used by businesses that launch brand-new products and gradually reduce their prices over time. This is often seen in markets such as smartphones, where a new phone version can be priced at a significant premium compared to models that are slightly older. As a general rule, this pricing strategy is most commonly seen in novelty products or high-tech products.
As an older generation of a product becomes less in style and more out of date, companies begin to sell that model for less while still commanding a premium on the newest, most recently released model of the product.
3. Keystone pricing strategy
Keystone pricing is most often used by retailers and big-box stores that want to price their products with a simple markup over their wholesale price. For keystone pricing, a retailer may take a product they bought wholesale and simply double the price to come up with their retail price.
This strategy allows the retailer to maintain a healthy profit margin on their inventory while ensuring that the price of their products isn’t completely outrageous compared to the competition.
4. Cost-plus pricing
Cost-plus pricing is very similar to keystone pricing in that it involves taking the amount it costs you to produce and manufacture your product and adding a fixed percentage increase over that cost. If your Shopify store has a specific number in mind for how much you would like to profit off of each of your products, you can do the math and calculations and work backward with cost-plus pricing to determine exactly what price you’ll have to sell your products at in order to generate your ideal percentage profit.
5. Value-based pricing
Value-based pricing bases the price of products and services on the amount a customer is willing to pay for them. When contrasted with cost-plus pricing, where a business will take the cost of goods into consideration, value-based pricing is based exclusively on the market.
Value-based pricing strategies work best for companies that sell very specialized, niche, and artisan products since customers can value items that are handcrafted or specialty-made more than something that was mass-produced in a factory. If your business sells commodity products that are easily found everywhere, you’ll have a much more difficult time with value-based pricing.
6. Penetration pricing
Penetration pricing, just as the name suggests, is a strategy used by companies and Shopify stores that want to break into a new industry and “jump-start” their sales. With this pricing strategy, you’ll intentionally price your products lower than the competition in order to drive a burst of sales and revenue.
Once you’ve attracted some initial customers and got the name of your brand out there, then you can raise the price back up to something in line with your competitors. The boost provided by penetration pricing is intended to help a new e-commerce business get seen and known by the marketplace.
7. Bundle pricing
Bundle pricing is used when a primary product or service can be bundled with similar or complementary products and services. In the Shopify and e-commerce setting, this is often done by making a bundle of three or five products worth less per unit than if somebody were to just purchase one single unit.
This encourages customers to buy from you in bulk and immediately raises your average sales value across your entire store.
8. Premium pricing
Premium pricing and commanding a premium price are used in markets that sell luxury products or services or want to maintain the perception of luxury and novelty. If a brand is trying to stand out from the competition and attract customers who “only want the best,” it can attempt to price its products or services significantly higher than the rest of the competition to achieve this perceived value.
Premium pricing can be a double-edged sword, however, if you aren’t careful. If a customer purchases a premium product from your business and realizes it is not actually premium or luxury, they’ll immediately get a negative perception of your company and likely spread the news to others.
If you charge premium pricing, make sure you can back up those premium prices with solid value propositions.
Choosing the right pricing strategy for your Shopify business
At this point, you should be very familiar with Shopify and e-commerce pricing strategies and understand exactly how to price your products or services based on your sales goals.
We’ve discussed how to determine your break-even point by calculating packaging costs, shipping costs, cost of goods sold (COGS), costs of marketing and promotion, and short-term overhead costs.
You’ve also learned all about defining your sales goals and the best pricing strategies you can implement into your Shopify business today.
The ball is now in your court – take these price strategies and implement them into your business, and you’ll likely see yourself getting more sales and generating increased profits, all by correctly and properly pricing your products and services.
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