The Side Hustle 06: My Two Step Guide to Pricing Your Product

Reading time: 2 mins.

Welcome to edition 6 of The Side Hustle, your weekend ecommerce tip, tale or yarn.

 A reminder that my new course, Ecommerce Start launches on September 1, and is currently 25% off for early enrolments.

While building out my course, I revisited all of the stages involved with launching a new online business. One of the modules I focus on, is to do with pricing your product.

If you're a business that's sitting below a 50% gross profit margin (unless you are a multi-brand retailer), then you've probably doing of the three things below:

1) Setting your retail prices too low

2) Not giving target prices to your supplier or adhered to any rules (buying too high)

3) Discounting too much

When I'm looking at pricing, I am focusing on two core aspects, which both need to be ticked off before a product goes in to production, and those are:

1) The unit economics, or profit margin of the product

2) The competitiveness of the price relative to the market

Here's how I approach those two elements:

Unit Economics

This one is simple. I need a 70% margin or more for the product to meet my criteria. That is, my landed cost price, divided by 0.3, equals my RRP (not including tax). 

Price Competitiveness

This one is trickier - not for me when looking at other businesses, because there's no emotion involved, but for founders, who will often overstate the true value of their product, due to an emotional attachment causing inflated pricing. 

So here's the process:

Step 1: Divide the landed cost price by 0.3 to get the retail price ex tax.

Step 2: Take the retail price ex tax, and benchmark it against your top 5 competitors. Personally for me, I don't want to be the cheapest, nor do I want to be the most expensive, so I want the price that's spat out of my calculator to be somewhere in the middle. I try and remove all guess work and emotion from the situation, and if those two elements aren't achieved, the product does not go ahead.

Elaborating a little further on why I don't want to be the cheapest, nor the most expensive; Generally the price leaders, or those that want to be the cheapest, are huge retailers achieving product margins far superior to what the average small to medium business would get, due to the size of their orders. They also tend to have much larger advertising budgets, and in some cases are operating with an operating expense ratio of less than 10% (consider I aim for 30% in my 50/30/20 rule. 

Nor do I want to be the most expensive, because...well there are cheaper options, so unless you're really special, it's harder to crack that market, which is often filled with high-end brands that once again, have huge ad budgets. I generally don't want to make price my differentiating factor, I just want to be priced competitively, and in a way that preserves my margins.

One simple way that brands can ensure they're not getting too far down the garden path with a supplier before realising the product price doesn't work, is to set target pricing. So when you're developing a product, or building a range, give yourself an idea of where the retail price needs to be, then work backwards from there. 

My pricing calculator in my online course, does that for you, but here's the cheat sheet:

Create a target RRP for your new product, take tax off, then multiple by your intended COGS - a 70% margin equals 30% COGS - so:

Target RRP less tax x 30% = target price to achieve a 70% margin.

So remember, when it comes to pricing your products, try my two step rule, and judge harshly - if you continue to allow low margin products to slip into your business, you're going to have to run a very lean business in order to generate a decent profit. Profit starts with pricing your product correctly, so make sure you start your journey to profitability off on the right foot.

Paul

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